How Does A Short Sale Affect Your Credit Score?

April 7, 2011

Foreclosure vs. Short Sale: Which Option Is Best For My Credit Score?

As someone who deals with homeowners facing foreclosure on a daily basis, I am often asked whether a short sale or foreclosure results in more damage to your credit. Unfortunately, there is no straight- forward answer. The reason why this is such a difficult question to answer is simply because it depends upon a variety of factors. In general, a short sale or foreclosure will affect your credit score 85-160 points. Many mistakenly believe, or are mis-informed, that a derogatory credit event such as a foreclosure is somehow worse than asking your lender to accept a short sale. In the world of credit scores, however, lenders interpret both of these events the same way: the customer did not pay as agreed. The degree to which your credit score will immediately be affected depends largely upon how delinquent you are on your payments at the time of the short sale or foreclosure. Neither event is “better” because they both seriously damage your credit and reflect your inability to repay a debt. With regard to the actual affect to your credit score, you can take proactive measures to mitigate the negative effect to your credit score. In order to understand why this is true, it is important to first examine how your credit score is calculated.

How Much Does A Short Sale Affect Your Credit?

What Is A Credit Score?

Each of the three major credit bureaus (Equifax, Experian, and TransUnion) collect information about your practices of borrowing and paying back credit. This information is compiled into a credit report, from which a credit score is calculated. While there are multiple formulas for calculating credit scores, the formulas introduced by the Fair Isaac Corporation (FICO) are the most widely used. This term is commonly referred to as your FICO score. All of these scores can be a bit confusing, so it might be useful just to think of “credit score” as a numeric grade of your credit history. Fair Isaac recently released a report stating that credit scores are affected nearly the same whether you go through a foreclosure or short sale. The report stated that the average points lost on a FICO score are as follows. Here are Fair Isaac & Co.’s tables:

Harm to FICO score

Consumer A Consumer B Consumer C
Starting FICO score ~680 ~720 ~780
FICO score after these events:
   30 days late on mortgage 600-620 630-650 670-690
   90 days late on mortgage 600-620 610-630 650-670
   Short sale / deed-in-lieu / settlement (no deficiency balance) 610-630 605-625 655-675
   Short sale (with deficiency balance) 575-595 570-590 620-640
   Foreclosure 575-595 570-590 620-640
   Bankruptcy 530-550 525-545 540-560


Time to Full Recovery

Consumer A Consumer B Consumer C
Starting FICO score ~680 ~720 ~780
FICO score after these events:
   30 days late on mortgage ~9 months ~2.5 years ~3 years
   90 days late on mortgage ~9 months ~3 years ~7 years
   Short sale / deed-in-lieu / settlement (no deficiency balance) ~3 years ~7 years ~7 years
   Short sale (with deficiency balance) ~3 years ~7 years ~7 years
   Foreclosure ~3 years ~7 years ~7 years
   Bankruptcy ~5 years ~7-10 years ~7-10 years


As stated above, the FICO score treats a foreclosure, short sale or deed in lieu of foreclosure exactly the same. They are all treated as “serious delinquencies.” Serious delinquencies are characterized by being in default a minimum of 60 days. Making matters worse, credit reports are limited in how they represent foreclosures, so it is generally impossible to tell from the face of the credit report if a reported derogatory event is a foreclosure, short sale, deed in lieu of foreclosure, settled account or some other variation.

How Are Short Sales Reported To The Credit Bureaus?

As stated in the previous section, FICO does not differentiate between a foreclosure or a short sale. Further complicating matters, lenders don’t have a uniform standard as to how they report a short sale to the credit bureaus. Some lenders report short sales as “settled as agreed” while others may report it as “account legally paid in full for less than the full balance.” In some cases, if the account is more than 120 days past due, the short sale will automatically show up as a “foreclosure” on the credit report. As a result, except in limited circumstances, the credit agencies typically treat foreclosures and short sales exactly the same.

According to the FICO guidelines, the most determinative credit score factor is being able to stay current on your account, or only slightly delinquent, in the months leading up to the derogatory credit event. By doing so, you thereby minimize the damage to your credit score by avoiding any serious delinquencies. This is not to be confused with your ability to purchase a home following a short sale or foreclosure, the mere existence of either event on your credit report will generally preclude you from buying a home for two to five years, respectively. Your credit score, however, will only be affected to the degree that you are delinquent on your payments.

Facts About Short Sales And Credit Scores

As previously mentioned, foreclosures and short sales have very similar effects on your credit because both events are reported to the credit bureaus as serious delinquencies.” The degree to which your credit is affected depends upon how delinquent you were on your payments before the derogatory credit event occurred. Thus, a homeowner who stops making payments at the beginning of the short sale process will have a very similar credit score effect as those who go through foreclosure because, on average, a short sale takes three to six months to complete and your credit continues to tank with each successive late payment. Each missed payment negatively impacts your credit score regardless of whether the house is sold as a short sale or foreclosure. As a result, your credit will be seriously damaged by either event if you allow yourself to become seriously delinquent.

Your credit score can only start improving when the late payments stop and you divest yourself of the home. Until recently, most lenders required homeowners to be delinquent on your payments in order to qualify for a short sale. This is no longer the case. Consequently, a homeowner could theoretically short sell their property without being considered seriously delinquent, and therefore suffer minimal credit damage. In contrast, a homeowner who goes through a foreclosure will be at least 90 days delinquent. Whether you will be able to purchase a home anytime soon is another story, and perhaps my next blog post, but from a credit score perspective, it is possible to mitigate the damage to your credit score by avoiding a “serious delinquency.” In all other cases, however, a short sale will affect your credit exactly the same as a foreclosure.

Myth: Short Sales Are Better For Your Credit Than A Foreclosure

It matters not to a lender why you failed to make your mortgage payments, only that you did. Lenders go to great lengths to alert each other, by way of reporting to credit bureaus, that the defaulting homeowner is someone who could not make their payment obligations. Thus, unless you can avoid being “seriously delinquent”, there is no credit score advantage to a short sale over foreclosure. A consumer’s FICO score will take a huge hit either way until responsible credit behavior supplants the foreclosure or short sale over a period of time. If you are able to minimize the immediate damage to your credit score, this will allow you to obtain credit, such as auto loans or credit cards, thereby putting you on the road to credit recovery faster than those who suffered a serious delinquency. With regard to buying your next home, the nation’s two largest mortgage investors, Fannie Mae and Freddie Mac, with certain exceptions, won’t lend to you again for five years (foreclosure) and two years (short sale).

Related Posts:

Short Sale Tax Consequences: Understanding The Qualified Principal Residence Exception

The Mortgage Forgiveness Debt Relief Act

How To Qualify For A Short Sale: The Involuntary Hardship

About the Author: Andrew Coppo of Greater Boston Short Sales, LLC (GBSS) is Massachusetts’ leading short sale negotiator. GBSS assists buyers, sellers, real estate agents and attorneys with getting their short sales closed. Contact us today if you are a homeowner facing foreclosure or a Realtor seeking assistance with a short sale transaction. GBSS is a MARS provider. Please read our disclaimer HERE.

If you are considering a Massachusetts short sale, and would like a free short sale consultation, please call Andrew Coppo to schedule a meeting or a telephone consultation at (617)264-0376.

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