Which Is Worse for Your FICO Score: Bankruptcy, Foreclosure, Short-Sale, or Loan Modification?

Foreclosure and its alternatives will cause your credit score to drop -- the amount depends on your credit history and other factors.

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If you are struggling to make your mortgage payments, are seriously behind, or already facing foreclosure, you may be wondering about the impact of foreclosure or foreclosure alternatives on your credit. The truth is, whether you file for bankruptcy, let your home go into foreclosure, complete a short-sale, or even negotiate a loan modification with the bank, your credit score will likely suffer.

But is there a difference between these options? Will one impact your score more than another? Read on to find out.

(For more options to avoid foreclosure, visit our Foreclosure Center.)

Your FICO Score

A credit score is a number assigned to you by a credit scoring company that predicts the likelihood that you will default on your payment obligations. Credit scoring companies use different factors and calculations to come up with your score, but for the most part the information they use is contained in your credit report.

There are many credit scoring companies, but the FICO score is used in 90% of all mortgage loan applications (according to FICO). Factors influencing your FICO score include:

  • Payment history (35%). Your score is negatively affected if you have paid bills late, had an account sent to collection, or declared bankruptcy. The more recent the problem, the lower your score.
  • Outstanding debt (30%). If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score. Also, if you carry a balance on a number of accounts, that might lower your score because it looks like you're overextended. This also considers the amount of debt you have compared to the amount of credit available to you.
  • Length of your credit history (15%). The longer your accounts have been open, the better.
  • New credit (10%). If you have recently applied for many new accounts, that may negatively affect your score. (Promotional inquiries don't count.)
  • Types of credit in use (10%). FICO says it's looking for a "healthy mix" of different types of credit, both revolving and installment accounts. This factor is important only if there isn't a lot of other information to use in determining your score.

FICO also recently announced its new FICO Mortgage Score. In addition to the above factors, this score may also take into account:

  • child support payments
  • payday loans
  • public records, and
  • rental payments.

Bankruptices appear on your credit report for ten years. Most other negative information, including foreclosures,  short-sales, and loan modifications (if they are reported negatively), will remain on your credit report for seven years.

Range of FICO Scores

FICO scores range from 300 to 850. Fair Isaac estimates that slightly less than 40% of Americans have FICO scores of more than 750, which most lenders would consider to be very good.

The Impact of Foreclosure and Foreclosure Alternatives on Your FICO Score

The impact that foreclosure, bankruptcy, short-sale, or loan modification has on your score depends on your credit history and how the lender reports the event to the credit reporting agencies.

In general, if your score is high to begin with, each of these options will cause a deeper dip in your score than if your score started out on the low side. Borrowers with high FICO scores may see their score drop 100 points more.

It will also likely take you longer to claw your way back to your original score it if starts out high.  However, time to rebuild credit is affected largely by your payment history and outstanding debt going forward.  If you have excellent payment behavior (that is, you make all payments on time), and your available credit increases, your score will improve more quickly than if you continue to make some late payments and are remain overextended.

Foreclosure, Bankruptcy, and Short-Sale

Bankruptcy, foreclosure, and short-sale often impact borrowers’ scores in a similar manner because borrowers usually resort to these options only when seriously delinquent. In addition, these events will be reported negatively on your credit report.

One matter that might make a difference however: If you do not have a deficiency after short-sale, it may be reported more favorably and have less of an impact on your score than if you do have a deficiency.

(Learn about deficiency after foreclosure.)

Loan Modifications and Forbearances

Most loan modifications are coded as CN  or CO on credit reports. For now, FICO is not considering these codes as either negative or positive (but this could change in the future). However, what FICO will consider is your previous credit history and how the loan modification or forbearance is reported.

If, for example, your lender reports you as “paying under a partial payment agreement” this may negatively impact your score. Remember, your score predicts how likely you will default on future loan obligations. So if you aren’t paying your mortgage as originally agreed, this will likely lower your score.

(To learn about government programs facilitating loan modifications, such as HAMP, visit our Government Foreclosure Prevention Programs topic page.)

What the Statistics Say

According to FICO statistics, on average, a bankruptcy is slightly worse for your credit than any of the other options discussed above.

When it comes to foreclosure versus a short-sale, according to FICO, homeowners who go through foreclosure tend to take longer to rebuild their credit. This may be attributed to the fact that for many homeowners, foreclosure is triggered by a traumatic life event such as divorce, job loss, or a medical problem – conditions that are likely to continue to cause financial stress and struggle after the foreclosure.

With the average short-sale, the former-homeowner is more likely to be in a position to stay current on accounts and decrease credit card debt. In fact, many people who go through short-sale see improvement to their FICO scores in just two years.

Keep in mind, however, that these statistics reflect the average situation. Your situation may be different. For example, if a job loss is what precipitates your short-sale, and after the sale you remain unemployed, you will likely have trouble improving your financial situation and your score. On the flip side, if you lose your home through foreclosure but don’t have any other delinquent accounts and your debt to available credit ratio is excellent afterwards, you may see an uptick to your score sooner.

(For tips on rebuilding your credit, visit our Credit Repair topic area.)

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