Foreclosure vs. Short Sale on Credit Score

short sale

If you’re having difficulty keeping up with mortgage payments, you may be wondering about the impact of a foreclosure vs. a short sale on your credit score.

Well, first thing first, neither is welcome news for your credit score. Both are deemed major derogatory events, and will lower your credit score tremendously.

Not only that, but you’ll have to wait to purchase a home again, assuming you finance it with a mortgage (that’s most of us, less the super-wealthy).

So your decision to foreclose vs. short sell goes well beyond the credit score impact. But let’s focus on that to keep things simple.

A recent Fico score study shed some light on the difference between a short sale and foreclosure.

Let’s take a look:

Starting Fico score: 680 (average credit score)

Short sale (no deficiency balance): 610-630
Short sale (with deficiency balance): 575-595
Foreclosure: 575-595

Starting Fico score: 720 (good credit score)

Short sale (no deficiency balance): 605-625
Short sale (with deficiency balance): 570-590
Foreclosure: 570-590

Starting Fico score: 780 (excellent credit score)

Short sale (no deficiency balance): 655-675
Short sale (with deficiency balance): 620-640
Foreclosure: 620-640

So what does this data tell us?

Well, for starters, it’s clear that the higher your credit score, the greater it will fall as a result of a short sale or a foreclosure.

Essentially, lower credit scores have less room to fall, and are also less impacted because there’s typically already negative information factored into the score.

Secondly, a short sale isn’t as bad as a foreclosure, assuming there isn’t a deficiency balance.

A deficiency balance is the amount the bank or lender wants you to pay back, which is usually the shortfall between the short sale price and the mortgage balance(s).

So you’ll want to negotiate a short sale that avoids a deficiency balance.

If there is a deficiency balance, the short sale is essentially treated the same as a foreclosure in terms of credit score impact.

This is a complicated subject, and one that probably requires the assistance of a tax/real estate/legal professional, so tread carefully.

For VantageScore, the impact of a short sale tends to be slightly worse than that of a foreclosure.