HOW DOES SHORT SALE / FORECLOSURE AFFECT YOUR CREDIT SCORE?
Aug 22nd, 2011
One of the key issues we always examine with consulting with upside-down sellers is the impact of a short sale or a foreclosure on their credit. While not as damaging as the risk of a deficiency judgment or debt forgiveness tax, credit damage impacts both the capacity to get another loan and can often adversely impact a borrower’s job and career. To get greater clarity on the credit impacts, I contacted Jeff Sipes at Blue Water Credit (www.bluewatercredit.com ) which helps people restore their credit standing. Here’s what Jeff provided:
By Jeff Sipes, Blue Water Credit: I am often asked what the impact of a short sale or foreclosure is on a credit score. Unfortunately, there is no straight-forward answer. This is such a difficult question to answer simply because it depends on a variety of factors. In general, a short sale or foreclosure will affect your credit score 85-160 points. Many mistakenly believe, or are misinformed, that a derogatory credit event such as a foreclosure is somehow worse than a short sale. In the world of credit scores, however, both of these events look the same way; the customer did not pay as agreed.
What Is A Credit Score?
A credit score is the statistical prediction of one’s likelihood to pay late over the next two years. The higher the score, the less likely one is to have a late payment. The bank then uses this number to assess the amount of risk involved with lending someone money. Banks are a lot like a casino in a sense, they like to place bets where they feel they will win.
Be aware that there are multiple credit scoring models. Some of the credit scores in these models go up to 990. While there are multiple formulas for calculating credit scores, the formulas introduced by the Fair Isaac Corporation (FICO) are the most widely used. This score ranges from 300-850. 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:
- 30 Days Late = 40
to 110 Points90 Days Late = 70 to 135 Points Foreclosure = 85-160 Points Short Sale = 85-160 Points Deed-in-lieu = 85-160 Points Bankruptcy =130 to 230 Points
How Are Short Sales Reported To The Credit Bureaus?
FICO does not differentiate between a foreclosure and 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. Both a short sale and a foreclosure will report on your credit for seven years from the date of first delinquency.
How to Maximize Your Credit Score during a Short Sale or Foreclosure
Since the number of delinquent accounts is factored into the score, try not to let any other accounts become late or delinquent (if possible). The second largest factor of your credit score is your debt ratio (the limit of your credit cards compared to the balances you carry) try not to let your balances exceed 30% of the limit. Only apply for credit when absolutely necessary. Do not close your credit cards. If you are able to do all of these things you will be back into the 700’s before you know it.
Credit scores play a large factor in our lives, but ultimately we have many other priorities that are more important. Credit, like many other things, will be healed over time.
The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you have specific questions about dealing with upside down loans or real estate, be sure to contact a real estate attorney in your State. We provide advice worldwide concerning California property. Please feel free to contact us at firstname.lastname@example.org . We offer a $200 flat fee attorney consultation to review your situation and help you evaluate and choose the best opportunities. This can be done in person or by phone. If interested, please call us at 916-966-2260.