The difference in credit-score impact between forclosure and short sale depends on homeowner

Foreclosure, deed in lieu and short sale all have an impact on your credit score. Just how much of an impact depends on you and your credit history.

Many people have been affected by the down turn in the economy, particularly in the housing market. Many homeowners’ credit scores were negatively affected by the decision they had to make about their home mortgages. Deed in Lieu, short sales, settlements and foreclosures have a major impact on an individual’s credit report and consequently on their score.

Frederic Huynh, principal scientist for Analytical Development Scoring for the FICO-Fair Isaac Company, a major credit scoring company, recently shared what the impacts are for individuals who have been affected by foreclosure, deed in lieu, short sales or settlements.

Mr. Huynh reported that consumers with previous indicators of not paying as agreed are more likely to demonstrate higher future risk of default. In relationship to mortgages, this risk is six to seventeen times higher when there is negative mortgage information reported verses no negative items reported. How this relates to changes in scores will depend on the person’s starting score. For example, if the starting score was 680, the impact would be as following:

  • Short sale, deed in lieu or settlement with no deficiency balance  610- 630
  • Short sale, deed in lieu or settlement with deficiency balance      575-595
  • Foreclosure                                                                             575-595

There is no substantial difference between deed in lieu, short sale, settlements and foreclosure. Another question many consumers have is how long it will take them to recover from negative information on their credit report. Again, it will depend on the person’s starting score. Using the 680 score again, on average, it will take three years, assuming there is no negative action on the report during this time frame.  Full recovery will take up to 10 years, again assuming that there is no negative action reported.

For more detail information on how a score is affected by negative information on a credit report, go to FICO Banking Analytics blog.

Over time, individuals need to realize that information in the trade line of the credit report drops off after seven years and this will positively affect the score. Also, as delinquent and derogatory information ages on the credit report, fewer points are lost as long as no late payments hit the file.

Individuals need to demonstrate to potential creditors that they are a good risk by keeping balances low, making payments on time and only applying for credit when necessary. With these practices in place many former homeowners who experience losing their home to foreclosure can own a home again.

For more information on how credit scores are calculated go to or

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