Credit scores can predict how likely you are to make timely payments, pay off loans, and help a lender understand how “risky” you are as a borrower. Your credit score is based on your lending history and your ability to manage and repay debts as agreed.
Financial slip-ups impact your score, such as failing to make timely payments or letting your mortgage payment slide. If you suffer a short sale or foreclosure, your credit score will suffer too—you’re a potential increased risk for a lender.
If you’re considering a short sale or foreclosure for your home, here’s how much your credit score could drop, how long a foreclosure or short sale will stay on your credit report, and what you can do to reduce the damage.
What Is a Short Sale?
A short sale allows you to sell your home and use the sale proceeds to pay off your mortgage—even if those proceeds don’t amount to the full loan balance. Because lenders often take a financial loss on short sales, this isn’t an option in every situation. You’ll need to reach out to your mortgage lender or servicer directly to inquire if a short sale is possible and any associated requirements.
“Most banks would prefer that a homeowner who has fallen behind on their payments or can no longer afford their home move forward with a short sale,” Yawar Charlie, a Los Angeles-based real estate agent, told The Balance via email. “It is more cost-effective for the lender and faster.”
A “deficiency” after is the difference between your mortgage and your property’s value. You may be responsible for the deficiency (depending on your state), or your lender may waive this amount, freeing you from responsibility for the difference.
What Is a Foreclosure?
If you fail to make your mortgage payments, you may face foreclosure when the lender seizes your property and sells it to make up for their financial losses. It typically takes four missed payments (after 120 days) to kick off foreclosure proceedings.
The exact foreclosure process varies by state, but you should receive notice in the mail if a foreclosure is headed your way.
Open and read all letters from your lender or servicer, and consider federal government assistance in avoiding foreclosure.
How a Short Sale Affects a Credit Score
According to Tony Wahl, director of operations at online credit analysis platform Credit Sesame, short sales (as well as foreclosures) should be considered “a last resort.”
“The short sale process is complicated, lengthy, and will have negative ramifications for a homeowner’s credit and finances,” Wahl said in an email to The Balance.
How much can a short sale impact credit, though? Data from the Fair Isaac Corporation (FICO) shows short sales can reduce a consumer’s credit score anywhere from 85 to 150 points, depending on where their credit started. For short sales, the impact is more significant when there’s a deficiency balance.
The impact is more noticeable for consumers with good credit—meaning a high score or few debts and overdue payments—than someone with an already low score. For example, someone with a higher score could see their credit score drop up to 20% in the worst-case scenarios, while a short-seller with a lower score might only see a 15% drop in the same situation. A short sale could stay on your credit history for up to seven years.
“When it comes time for that consumer to buy a new home, most mortgage lenders will be more lenient with a prior short sale than with a prior foreclosure,” Wahl said.
If you think you’ll buy another home sometime in the future, be sure to get a letter from your lender confirming the short sale, which could help you qualify for a new loan.
How a Foreclosure Affects a Credit Score
Foreclosures have a slightly worse impact on credit score, according to FICO. Depending on their starting score, most homeowners who suffer a foreclosure see their credit scores drop between 85 and 150 points or about 12% to 20%.
For example, someone with a “good” starting score of 680 could decrease to between 575 and 595, which is in the “poor” to “fair” score ranges. Someone with a “very good” score of 780 may decrease to between 620 and 640, or the “fair” score range.
A foreclosure can impact a consumer’s credit for up to seven years. Of the 7 million-plus Americans who experienced foreclosure between 2004 and 2015, a little over half still had a credit score rating falling into the “poor” range at the end of 2015.
Mortgage loan qualification is difficult with a foreclosure on your record and can mean waiting as much as seven years to buy a new home. A foreclosure won’t be removed from your credit history until seven years after the first missed payment.
Late Payments and Your Credit Score
Late payments have one of the most significant negative impacts on your credit score. Late mortgage payments could lead to a double-whammy on your credit score, impacting it long before your short sale or foreclosure happens.
“In both circumstances, the lender will be reporting your late or missed payments,” Charlie said. “Therefore, your credit score will already be negatively impacted—and most late payments take several years to fall off your credit report.”
According to FICO, falling just 30 days behind on your mortgage can result in a credit score drop of up to 110 points. At 90 days, the decrease could go up to 130 points.
Rebuild Your Credit After a Short Sale or Foreclosure
A short sale or foreclosure doesn’t cause permanent credit damage. Though it takes time, there are ways to improve your score and your future financial options.
According to Wahl, you should aim to make consistent monthly payments on any other debts.
“Remind yourself that this is a long game and will take time,” he said.
In the meantime, you can request help from the National Foundation for Credit Counseling or another nonprofit credit counseling agency. Counselors can walk you through your options for improving your credit and help you toward recovery from your short sale or foreclosure.