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Short Sales and Foreclosures Have Same Effect on Credit

Are you confronted with a possible short sale or foreclosure on your home? If so, you may be wondering how long it will take your FICO scores to FULLY recover after one of these bombshells hits your credit reports. It's a great question, and it happens to be one that we receive emails about every day. Well, now we have some hard data from FICO that finally helps clear up all the confusion around FICO scores, short sales, and foreclosures.

Check out this chart: Estimated Time for FICO Score to Fully Recover, which was released yesterday on one of FICO's blogs. Essentially, what FICO's telling us is that if you have a good starting score (780), it will take your FICO score about 7 years to fully recover. In addition, there's absolutely no difference in recovery time between short sales or foreclosures. The overall effect on credit scores is the same as well. However, if your starting FICO score is lower, then your score should fully recover in a much shorter period of time. The estimated recovery time for those with FICO scores around 680 is 3 years—less than half the amount of time those with higher starting scores may have to wait.

What have we learned? Ignore all the gurus out there that keep preaching how short sales are better for your credit than foreclosures. It's just not true.

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Joshua Heckathorn's picture

Joshua Heckathorn was President of Creditnet, is a credit expert and has been featured on CNNMoney, FOX Business, Yahoo Finance, The Street, and many other national publications during the past ten years.  He received a Bachelor of Science in Management (Finance) from Brigham Young University's Marriott School of Business and earned his MBA from Seattle University.

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Sam Day's picture

When I sold my business property, I didn't want a short sale, but I ended up owing a small amount— a few thousand dollars— after closing. Rather than letting the bank write it off, I insisted on paying it off as a personal loan. I assumed this would mean a short sale would not afflict my credit score, but I never checked. I know my score, but don't know how to tell how if this event affected it. It's been two years. How do I follow up?

Joshua Heckathorn's picture

@Sam - Pull your free credit reports from annualcreditreport.com and take a look to see if the short sale is listed. I think it's great that you decided it was important to pay off the difference via a personal loan, but that doesn't change the fact that it still closed as a short sale. The damage to your score was likely done when the short sale hit your credit reports. That said, your FICO scores should have recovered some by now; however, they probably haven't fully recovered.

Samantha's picture

Can I do a quit-claim deed to one of my parents in order to prevent the bank from putting a lien on my primary residence? The one that will be going into foreclosure is another property that I have. I will be responsible for the mortgage, but the title will be in their name, and I was thinking if it wasn't in my name then they wouldn't be able to put a lien on it.

I recently divorced and I am unable to pay two mortgages. Rental of the property is out of the question, as it's in a bad area.

Joshua Heckathorn's picture

It may delay the process a bit, but they'll eventually come after you for fraudulent transfer. Your mortgage company may also take issue with the fact that you transferred the property out of your name, so you'll want to clear it first with them as well.

Samantah's picture

Why would it be fraudulent? I want to protect the home, that I am living in. But, I have to let one go because I just can't afford two mortgages since my divorce.

I know that my credit score will take a hit as a result of a foreclosure, but I have another question. Is the negative impact, an accumulation of the late payments plus the foreclosure, or will late payments be replaced by foreclosure?

For instance, say my credit scores is 700 and with the late mortgage payments it has dropped to 620 and then the house goes into foreclosure and the it then drops to 500. Or will it simply be in the long run drop to 550, because of the foreclosure. I sure hope I didn't confuse you.

Joshua Heckathorn's picture

They could claim that it was a fraudulent transfer if you did it right before your investment property is foreclosed on and you had the intent to avoid your creditors. I'm not saying they will be successful, but you may want to chat with a good RE attorney before going down that road.

Also, your FICO scores will be negatively impacted by both the late payments and the foreclosure. The late pays will remain even when the foreclosure hits your reports.