Short sales are no better for a homeowner’s credit than damage done as a result of a foreclosure, according to FICO officials. The increase in bank assisted short sales, in which lenders cooperate with mortgage holders to sell a home at less than what is owed on the mortgage is gaining momentum and is a critical part of the U.S. housing recovery.
“While it is true that short sales represent better risk than foreclosures,” wrote FICO analytical scientist Fredric Huynh, “they do not perform well enough to merit more positive treatment in the FICO score.”
Financial executives, including many bankers have long maintained that homeowners’ credit scores are damaged less with a short sale over a foreclosure. However, Huynh who writes a blog for FICO in addition to duties researching the complicated intricacies of credit behavior dispels the theory. “In the population we studied, one out of every two borrowers who experienced a short sale went on to default on another account within two years.
“That is exceptionally high risk,” wrote Huynh in a blog post. “Additionally, the overwhelming majority of consumers with short sales have some other evidence of mortgage delinquency.”
Whether a borrower is foreclosed on a home or other real estate, signs a deed in lieu of foreclosure or does a short sale equally damages the mortgage holders FICO credit score.
Consumers who cooperate with lenders in a short sale performed no better than mortgage borrowers in serious delinquency on their home loans, 90 days or more past due, and others with a collection, bankruptcy or tax lien, a FICO study showed.
“By comparison only about one in every fifty borrowers with a score in the high 7
00s will default on one of their credit obligations,” wrote Huynh.