Foreclosure vs. Short Sale

A man looking at his computer

Dear Experian,

Which has a more negative effect on my credit score, "Account Paid In Full For Less Than the Full Balance" or "Foreclosure?"


Dear ZPT,

Although it may be less detrimental than a foreclosure, a mortgage loan that shows "account paid in full for less than full balance" or "settled" will likely have a substantially negative impact on your scores because it means that you did not repay the debt in full as agreed.

A "Short Sale" Will Appear on Your Credit Report As "Settled"

You may have heard the term "short sale" when discussing selling a home for less than is owed on the mortgage. The term "short sale" is used to describe negotiating settlement of the mortgage, but does not appear in a credit report. In your credit report the account will be shown as "settled" or "account paid in full for less than the full balance."

If the account was delinquent at the time it was settled, it will remain on the credit report for seven years from the original delinquency date. Accounts that were never late prior to being settled will remain on the report for seven years from the date of settlement.

Short sales are typically done to avoid foreclosure on the home. In order for a homeowner to sell their home for less than what is owed on their loan, they must first get approval from the bank who owns the loan.

The homeowner will have to provide the mortgage lender with documentation showing that the short sale is necessary because they are no longer capable of making their mortgage payments.

Foreclosure on a Credit Report

While settling your mortgage loan is considered negative, it may be viewed less negatively by future lenders than a foreclosure. Having your home foreclosed on means that you stopped making payments and the lender had to use legal proceedings to take ownership of the home so they could recover the debt. Therefore, a status of foreclosure will have a very negative impact on your credit scores.

A foreclosure remains on the credit report for seven years from the original delinquency date.

How Much Will a Short Sale or Foreclosure Impact Scores?

Credit scores take into account each individual's overall credit history, so it's impossible to say exactly how much a short sale or foreclosure will impact your credit scores. However, according to VantageScore LLC, a mortgage loan settled through a short sale typically results in a change of 120 to 130 points in the VantageScore credit score. A foreclosure generally causes a decline of 130 to 140 points.

Thanks for asking.
The "Ask Experian" team