FICO dispels myth: Short sale may damage credit score as much as foreclosure

Turns out that a short sale doesn’t protect a homeowner’s credit score as much as originally thought.

This blog post from FICO is several days old, but still too good to give a miss. It’s title asks: “Are short sales really that bad?”

The answer, they explain, is yes.

While it is true that short sales represent slightly better risk than foreclosures, the post states, they do not perform well enough to merit a more positive treatment in the FICO score calculation.

In a population study, 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,” writes FICO scientist Frederic Huynh. “Additionally, the overwhelming majority of consumers with short sales have some other evidence of mortgage delinquency.”

As a result, terrible mortgage-related events, such as foreclosures, short sales, etc., all get filed into the same credit-risk bucket.

So while it’s true short sales are not as bad for personal credit scores as foreclosure, it’s still pretty bad.

jgaffney@housingwire.com