The Effects of Foreclosure on Credit Score

Posted on 03/26/2010 at 12:00 am by Viewed 4,461 times

Consumers frequently ask about the damage done to their credit scores if a bank forecloses. There are lots of opinions available regarding the answer to this question. Often the answer depends on who you ask.

We frequently hear reports from clients who have been told that a short sale or a deed in lieu is better for credit purposes than an actual foreclosure. According to Fair Isaac Co. (aka FICO), the company that created the credit score concept that is most used by the credit industry, there is likely little or no difference at all between a foreclosure, a deed in lieu, or a short sale.

When credit bureaus report information about accounts, they have a limited ability to explain what actually happened on an account. Therefore, it is typically not possible to discern from a credit report whether a consumer was foreclosed on, or whether they negotiated a deed in lieu or a short sale.

A consumer’s credit is impacted significantly by any of these events and the credit bureaus report them all as serious delinquencies. The impact is analogous to the impact of a tax lien, charge off, or an account included in bankruptcy.

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