Impact to Credit Scores: Short Sales and Foreclosure

What impact does a short sale or foreclosure have on my credit score? Some consumers get told answers that are completely incorrect and given to them by “so called” professionals they expect to have the education and expertise to inform them accurately.

The truth is there is no way to know exactly what will happen to the credit scores after a short sale or foreclosure, since each credit profile is different and unique.

A short sale is when the lender approves on the homeowners request to sell the home for less than the mortgage owed, there are two types of short sales.

Short Sale with NO deficiency balance:

This type of short sale means that the bank will forgive the remainder of the debt on the mortgage and accept the sale of the home for less. The sellers will not have to pay back the balance on their mortgage.

A 780 FICO Score will drop to a 655 – 675.

A 720 FICO Score will drop to a 605 – 625.

A 680 FICO Score will drop to 610 – 630.

Short Sale with a deficiency balance:

This type of short sale means that the bank will not forgive the remainder of the debt. The sellers will still need to pay back the rest of their mortgage after the short sale is complete.

A 780 FICO Score will drop to a 620 – 640.

A 720 FICO Score will drop to a 570 – 590.

A 680 FICO Score will drop to 575 – 595.

While this information can never be completely accurate, the best course of action would be to reach out to a credit adviser that is not only well educated, but also has a wealth of experience. With 25 years of reputable credit experience and education, I can ensure my team and myself will be committed to providing expert service and working towards you credit goals. Please feel free to reach out to me with any other credit questions or inquiries.         

What is a foreclosure?

The option for a short sale is available prior to the home or property going into foreclosure. A foreclosed-on home is owned entirely by the financial institution that hold the mortgage, the previous owners are evicted by the lender in this case. The bank of lender will then put the home up for auction or sell through an agent to try and make back the balance due on the mortgage. In this event, the previous owner will likely be restricted on future home purchases, it could be 5 to 7 years until they are eligible to purchase again.

Having a foreclosure will cause severe damage to credit scores and will remain on reports for 7 years, scores could drop by 200 – 400 points depending on how high scores were prior and other information reporting. It’s likely, if someone reaches foreclosure, that their credit is already significantly damaged.

What should be considered before moving forward with a short sale

There are many areas that must be reviewed before making an educated decision whether entering a short sale is the best choice for each individual.  One must look at future and short term goals that may be affected by the damage done to the credit as well as legal and tax consequences.

  1. First a consumer must evaluate comparable houses in the area that have sold recently to consider what the right price to place the home on the market would be.
  2. Getting a realtor involved that has experience with short sales can be very helpful.
  3. Pull a current copy of your credit report and FICO scores to see where you are at in regards to your current credit condition.
  4. Have a credit expert access the damage a short sale will cause to your credit and the time it will take to recover.  They must consider your short term financial goals.
  5. Consult with a CPA and a real estate attorney to find out the tax and legal consequences involved in the process.
  6. The realtor should be able to tell you if they believe, based on your financial situation, whether the short sale will be approved.

Moving forward with a short sale must be approached with thought and strategy keeping in mind future plans and credit score sacrifices.   Although all consumers want to protect their scores if you can’t pay your bills, put food on the table, and you are up all night worrying sacrificing your credit is a small price to pay since credit is never terminal.  As time goes by and delinquencies age credit scores will improve.


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