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Question: Do foreclosure alternatives, such as a shortsale or deed-in-lieu, affect my Fair Isaac Corporation (FICO) score any differently than a foreclosure?

Answer: No. Taken as a single event, foreclosure, shortsale and deeds-in-lieu all affect FICO scores equally. FICO considers each action as “not paid as agreed accounts.”

For FICO’s words on the matter, see their topic: Are the alternatives to foreclosure any better as far as my FICO score is concerned?

The difference in credit score impact observed by real estate professionals and their clients is mainly determined by the history and frequency of delinquencies leading up to the foreclosure, shortsale or deed-in-lieu.

One 30-day delinquency can subtract 60 – 110 points, and the longer a seller is delinquent the worse damage to their credit score. These credit blunders can add up very quickly, so getting out sooner rather than later is usually a distressed homeowner’s best course to minimize damage to their FICO score.

A foreclosure or foreclosure alternative can drop a credit score by 150 points or more and will remain on a seller’s record for seven years. Still, foreclosure and its alternatives are not as damaging as filing for bankruptcy, which can drop a credit score by as much as 240 points and remain on file for seven to ten years.

Related article:

The FICO farce

The FICO score delusion

A commenter asked how foreclosure and short sales affect the ability to borrow in the future based on Fannie Mae, Freddie Mac and Federal Housing Administration (FHA) requirements. We appreciate the question, it is correct the FICO score is just one of the factors which affect a homeowner’s ability to borrow in the future.

Fannie Mae and Freddie Mac require seven years to pass after foreclosure before a buyer becomes eligible for financing. However, if the buyer can document that extenuating circumstances caused the foreclosure (a job loss, long-term illness, etc.), the seven-year waiting period may be reduced to three years.

Fannie Mae and Freddie Mac require two years to pass for a buyer completing a shortsale or deed-in-lieu to become eligible for financing, if the loan-to-value ratio (LTV) on the new home will be 80% or less. If the LTV will be greater than 80% and less than or equal to 90% the waiting period is four years. Any higher LTV results in a seven-year waiting period. [Fannie Mae June 26, 2012 Selling Guide B3-5; Freddie Mac Single-Family Seller/Servicer Guide 37.7]

A buyer who was current on their payments at the time they complete a shortsale is eligible for an Federal Housing Administration (FHA)-insured loan without any waiting period. A buyer who is in default must wait three years before he is eligible for FHA-insured financing, unless he can demonstrate extenuating circumstances. [HUD Handbook 4155.1 4.C.2.l]

FHA-insured loans may be granted three years after a buyer completes a foreclosure or a deed-in-lieu. The three-year waiting period may be waived for extenuating circumstances. [HUD Handbook 4155.1 4.C.2.f]

It is important to note that in some instances, lenders may overlay more stringent guidelines than the bare minimum set by Fannie, Freddie or the FHA.