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Short Sales Are No Better for Your Credit Than a Foreclosure

There’s never been much doubt that homeowners who go through a short sale or deed-in-lieu of foreclosure take a hit to their credit score.

Credit agencies don’t usually go into detail about their methodology, and the common thinking among most mortgage industry folks has been that a short sale or deed-in-lieu isn’t nearly as damaging as full-blown foreclosure.

Turns out that isn’t quite the case. In fact, there’s new research suggesting that when it comes to credit score fallout, there’s no significant difference between a short sale and a foreclosure.

The findings may shape the way homeowners on the edge proceed with unloading their properties in the coming months.

Foreclosure v. Short Sale

A short sale occurs when a lender allows a homeowner to sell their property for less than what they owe. Foreclosure can be a time-consuming and expensive process, and it's one that not all banks have the stomach for in the current market.

FICO, which produces perhaps the most common credit score in the country, ran simulations on how mortgage delinquency would affect three hypothetical borrowers with scores of 680, 720 and 780. The FICO score ranges from 350 to 800.

Here's a look at where these starting scores ended up after a foreclosure and a short sale:


680 score 720 score 780 score
575-595 570-590 620-640

Short Sale

680 score 720 score 780 score
575-595 570-590 620-640

There's no difference in the FICO projection. The agency also saw no difference in the estimated time it would take for homeowners to fully recover and repair credit.

Harsh Treatment?

Some of the differences between these two actions have left homeowners and even mortgage industry folks wondering if FICO is taking too harsh a stance on short sales. After all, these homeowners are still trying to work with the bank to meet their obligation, and many are victims of the economic crisis and plummeting real estate values.

But FICO officials note that homeowners who execute a short sale are by no means a safe bet. In fact, studies have shown that people who experience a short sale have more than a 50 percent chance of defaulting on another account within a couple years.

Military borrowers who experience a foreclosure or short sale can still utilize their VA home loan benefits. But you'll need to wait at least two years before being able to secure financing. Spend that time working to repair your credit and get ready for prequalification. If you need some help with that, contact our Lighthouse Program. They work with military borrowers for free to develop a plan to rebuild their credit. You can reach a Lighthouse credit specialist at 888-392-7421.