Deed-in-lieu, foreclosure, short sale: which is hardest on your credit?

Because credit scores can affect everything from buying a house to renting an apartment to getting a job, you might say it’s important to try to keep your credit score in the acceptable range if you’re planning to do any of these things.

But what happens to your score when you own a property, you’re in financial trouble and you can’t keep up with your payments? Which is worse — a short sale or a foreclosure? Does missing even one payment put a big ding in your score? How long does it take to rebuild credit after a short sale or foreclosure?

FICO (Fair Isaac Corporation) has published information on what happens to credit scores with different distress situations. From Kathleen Pender’s recent article at SFGate.com:

– Missing a mortgage payment by more than 30 days can have a severe impact on FICO scores. The higher the starting score, the bigger the damage.

One late payment could knock about 100 points off a 780 score, 80 points off a 720 score, or 70 points off a 680 score. FICO scores range from 300 (lowest) to 850 (highest).

– A short sale or deed-in-lieu of foreclosure will have roughly the same impact as a foreclosure if the loan servicer reports the short sale or deed in lieu to the credit bureau with an unpaid balance or deficiency amount. The impact would be less severe if the servicer reports it with a zero deficiency.

– Scores will begin to recover sooner after a short sale or deed in lieu than after a foreclosure, mainly because a foreclosure drags on longer, says Joanne Gaskin, director of FICO global scores.

The FICO website is more definite about the effects of short sales, foreclosures, or deeds-in-lieu of foreclosure (this is a situation when the owner deeds the property to lender in exchange for being released from the loan). It says: “[A]s far as your FICO score in concerned, there is no difference between foreclosures and short sales or deeds-in-lieu of foreclosures. Each of these actions is considered an account that was “not paid as agreed”, and will have the same impact to your FICO score.”

The study in the article says there are variations in the damage to credit scores; the FICO website says it’s all the same. I think it’s safe to assume that any of these events will have a very negative impact on a homeowner’s credit score. The good news is that recovery can start almost immediately and even a bankruptcy stops affecting a score after seven years.