Home > Mortgages > Foreclosure vs. Short Sale: What’s Worse for Your Credit?

Comments 4 Comments
Advertiser Disclosure


Short sales are on the rise and more and more underwater homeowners asking how their credit scores will fare after a short sale or foreclosure – and how the two outcomes compare.  It’s a good question, since the homeowner will have to live with the consequences of this decision for at least seven years, the length of time “derogatory” information remains on a credit report.

Whereas you can expect a loan in foreclosure to appear on your credit report as a “foreclosure,” there is no such single, universally accepted description for short sale on credit reports, such as, well, “short sale.”  Instead, a loan paid via short sale tends to be labeled as either “charge off,” “deed-in-lieu of foreclosure,” or “settled for less than the full amount due” – all having about the same negative impact on your score as a foreclosure.

[Credit Score Tool: Get your free credit score and report card from Credit.com]

Does this mean then that a foreclosed mortgage loan appearing on your credit report will always have about the same impact to your score as a short sale?  As with many credit scoring issues, the answer is both yes and no, depending on other information being reported about the loan – in this case, the balance and the past due amount. Generally, the higher these dollar amounts, the lower the score. (Read “What’s A Credit Score? Really?” if you’re looking for a clear explanation of credit scores.)

To dig a little deeper into the specifics, when a foreclosure is reported by a lender to the CRA (credit reporting agency), the balance appearing on the credit report for that item consists of the entire unpaid loan amount as of the date it went to foreclosure.  For a short sale, the reported balance is made up of the outstanding loan amount as of the date of the short sale, less the sale amount received from the buyer and agreed to by the lender.  If the difference between the reported balances under each of these two scenarios is substantial — and it should be — the negative impact to the score will be less for a short sale than a foreclosure.Free Credit Check & Monitoring

Past due amounts reported for a mortgage loan will impact the score similarly, as a higher past due amount leads to a lower score.  Typically, when a loan in foreclosure appears on a credit report, the entire outstanding balance also appears as the past due amount.  For a short sale, there should not be any past due amount reported — another plus on the short sale side of the equation.

[Related Article: Underwater on Your Home? Your Six Options]

But before future short sale sellers get too excited about this seemingly good news, they should also understand that any scoring benefits resulting from a short sale/foreclosure comparison are not likely to be either significant or long lasting. Such advantages tend to dissipate within a short period of time, as other, more recently reported information begins to have more of an impact on the score.

[Featured Products: Research and Compare Mortgage Rates at Credit.com]

Nor is it a good idea to base a short sale vs. foreclosure decision strictly on the anticipated impact to a credit score, when other factors, such as the ability to qualify for a mortgage in the future, are likely to affect your finances and general wellbeing long after your credit score has begun to recover.

Image: shouldbecleaning, via Flickr

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • Pingback: What to Do If Foreclosure is Killing Your Credit » AtHomeSense.com AtHomeSense.com()

  • John Murray

    Thank you for this timely article. I will surely bookmark it. Thank you

  • http://yahoo Lewis

    Well me and my husband are haveing a hard time in finding a place to live due to a forclosure and I understands it stays on for seven years but the thing about it is that we had a an offer for a short sale but the bank denied the offer . So what do you do in a case like ours. I no neither is good but at least we were making an effort to have someone purchase the house some people just walk away. Any suggestions.

    • http://forum.credit.com/ Barry Paperno

      Thanks for your comment. I agree there should be some benefit to you for trying to arrange a sale vs. walking away from the home. But unfortunately, the only real advantage to a short sale, other than possibly a little less of a score impact, is that a short sale won’t prevent you from obtaining a new mortgage during the next few years like a foreclosure will.

      Either way, you can rebuild your credit score long before the foreclosure falls off in 7 years if you keep all of your other credit accounts current, keep credit card balances low (below 25% if possible), and only open new accounts as necessary. Opening a new secured credit card or two is okay if you don’t have any other cards, as that will help you rebuild a positive credit history.

      Hopefully you’ll find an understanding landlord who will see the positive side of your credit experiences, which may be that you’ve handled credit for a number of years, paid loans as agreed, etc. Good luck!

  • Jackie

    Fascinating how nearly all agents market the impact of a short sale as non existent. However fico suggests the opposite (exactly the same hit like a foreclosure).
    Heres a good credit impact breakdown on this site http://practicallist.com/real-estate-short-sale along with fico as well as fannie mae data.

  • Pingback: Why are Short Sales So Bad for Your Credit? | ComparePlastic()

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team