How Will Foreclosure, Short-Sale, Deed-In-Lieu of Foreclosure, and Bankruptcy Affect A Credit Score?

Every day we have more and more clients ask us the question of how foreclosure affects their credit score vs. bankruptcy, or whether it may be more beneficial to short-sale a house rather than a bankruptcy, and the answer is always, "It Depends." This may seem like an evasive lawyer-like answer, but it is true. The answer always varies depending on each particular person's individual situation. No two people's credit situation is exactly alike; therefore, the answers will tend to change depending on the person's spending habits.

There are many different factors in the determination of your credit score, including things such as how long you have had credit, if you make monthly payments on time, how much credit you have available to spend, how many different credit accounts you have. How a foreclosure, short-sale, deed-in-lieu of foreclosure, or bankruptcy affects your credit score depends on what your credit score was prior to the foreclosure, short-sale, deed-in-lieu of foreclosure or bankruptcy.

Home Line Of Redit

A foreclosure occurs when you are unable to pay your mortgage for a long period of time. The mortgage lender takes back your home to sell to someone else. A short-sale is when you sell your home for less than what you owe on the mortgage. You would need your mortgage lender's approval prior to the short-sale of the home. A deed-in-lieu of foreclosure is essentially giving title of your home back to your mortgage lender in exchange for having the debt forgiven and not having a foreclosure on your credit report.

A bankruptcy is when you receive a discharge of all your debts, and your personal liability for all of the debt is wiped out. For secured debt, like houses or cars, you can keep the property if you continue to make payments, but the lenders will not be able to pursue you for any deficiency if you choose to surrender the property in the bankruptcy.

Most people are surprised to know that foreclosure, short-sale, and deed-in-lieu of foreclosure have approximately the same impact on a credit score. All three of these ways to lose a home are reported to the credit bureaus as having the account settled for less than what was owed. People have always been under the impression that a short-sale may be better than a foreclosure, or signing a deed-in-lieu of foreclosure is better than either a foreclosure or a short-sale. However, the important factor in determining a credit score is how long an account has been delinquent, such as 30 days, 90 days or 120 days. Most of the time people that have a foreclosure, short-sale, or deed-in-lieu of foreclosure on their credit report have been delinquent on their mortgages for a long time. By the time the foreclosure, short-sale, or deed-in-lieu of foreclosure actually take place, the damage to their credit score has already been done. The higher your credit score is, the steeper the fall. The opposite is also true. If your credit score is already low, having a foreclosure, short-sale, or deed-in-lieu of foreclosure will not affect it as much. There is no such thing as having a negative credit score, so there's a limit to how low your credit score can go.

Filing bankruptcy generally lowers a credit score the most, because you are receiving a discharge of all your debts, so it has a bigger impact. However, if you are struggling under a mountain of bills and a mortgage you cannot afford, bankruptcy may be the best option for you, regardless of how it impacts your credit score.

How Will Foreclosure, Short-Sale, Deed-In-Lieu of Foreclosure, and Bankruptcy Affect A Credit Score?