One of the unfortunate realities of the recent economic recession has been that many people find themselves no longer able to afford the homes that they live in. It could be that they’ve lost a job and therefore the ability to pay their mortgage payment, or it could be that they’ve lost so much value in the equity in their homes that it’s no longer worth it, financially, to continue to pay for the home. Regardless of the cause, many people find themselves facing some tough decisions. Often, that is a decision between having their home foreclosed, or selling their home for less than what they owe in a short sale. The real problem is that neither of these is a particularly attractive option, and both can be equally detrimental to their credit score.
Now, to be sure, the FICO formula isn’t publically available. You can’t know for sure how a short sale would affect your credit score without actually going through it, and at that point there’s no way to directly compare what would happen with a foreclosure.
You can be fairly certain that a person who has a 780 credit score will lose between 140 and 160 points for a short sale or a foreclosure. The penalty for these kinds of problems is more significant when you have a high credit score to begin with. If you have excellent credit, you’ll wind up with subprime credit or credit that’s nearly subprime once the short sale or foreclosure goes through.
The other problem is that you can’t really be sure how long it will take for your credit score to repair itself after a short sale or foreclosure. You’ll start to climb back out into good territory after a few months, but it may take several years – as long as seven years – for you to get back to your peak credit score.
Finally, be careful with agreements you sign with the lender. Sometimes, a short sale agreement won’t talk about what happens to any unpaid debt, and others specifically hold you accountable.