What’s worse for your credit score: Foreclosure, short sale, or deed in lieu of foreclosure?

When you’re staring at the bills, and the numbers aren’t adding up, you’re likely considering all your options. The idea of losing your house is an emotionally and mentally tricky thought to dig your way through. If you’re in a position where foreclosure, short sales, and a deed in lieu of foreclosure are becoming your only options, you need to act quickly to make the best decision possible.

Here are a few things you need to know so you can make the best choice for your financial situation:

Short sale:

When homeowners choose a short sale, they sell the home for less than what they owe on the mortgage. The lender must agree to accept less than what is owed. In some cases, the sellers are still responsible for repaying the difference between the sales price and the mortgage price. The lender can dictate a minimum price they’re willing to accept. Some lenders require an offer before considering a short sale.

To qualify for a short sale, you’ll need to show the lender you cannot pay your mortgage. The lender will typically ask for financial statements, tax returns, and a letter outlining your financial hardship.

Once the short sale is approved and finalized, the new owner takes the home, and you’re released from the mortgage.

How a short sale affects your credit score:

The impact on your credit score will depend on whether you were up to date with your payments before you opted for a short sale. If you didn’t miss any payments before, your score will drop, but not as severely. A short sale will stay on your credit for seven years, but you may be able to qualify for a new home loan in three years.

Deed in Lieu of Foreclosure:

 In a deed-in-lieu of foreclosure, the homeowner gives up the house voluntarily to the lender. The lender then releases the buyer from their responsibility for the mortgage. The lender can then sell the home to recoup their losses. If you want to do a deed in lieu of a foreclosure, you’ll need to prove financial hardship and provide documentation, like with a short sale. But you won’t have to deal with the sales process. Once you sign the paperwork, the lender releases you from your mortgage.

In some cases, lenders will offer cash for keys, which means they pay some of your moving expenses, so you can get back on your feet again.

Deed in lieu of foreclosure is a private matter and not made part of public records.

How a deed in lieu of foreclosure affects your credit:

Since you’re not repaying your loan, your credit score will take a hit. You may not be able to buy a home for two to three years, but the damage won’t be as severe as with a foreclosure.


During foreclosure proceedings, the lender legally takes a house from the buyer and sells it to repay the borrower’s debt. Since a foreclosure is a legal proceeding, there will be documents and public records. The lender is legally required to post public notices of the foreclosure. The foreclosure process may feel invasive and embarrassing for homeowners.  

Foreclosures are time-consuming and expensive for the lender. Lenders typically pursue foreclosures when they feel it’s the only option they have left to get their money. Most foreclosures are triggered by missed payments, but lenders may issue a foreclosure if a borrower breaks other terms in their loan. Lenders will typically try to work with borrowers to find other solutions before moving on to foreclosure proceedings. Once your house payments are 90-days late, the lender will send out a notice of default. The default is more severe than a late payment. Still, it allows the homeowner to avoid foreclosure proceedings if they settle their payments and reinstate the mortgage loan.

If the homeowner cannot settle their payments or work out a repayment plan with the lender during the 30-days following a default letter, the lender will begin the foreclosure process.

In some cases, foreclosures can take more than a year to process, so it’s in the best interest of both the lender and the homeowner to work through a different solution.

How foreclosure affects your credit:

A foreclosure wills stay on your credit report for seven to ten years. If you have a foreclosure, you won’t be able to purchase another home for up to seven years. Some landlords won’t rent properties to individuals with foreclosures either.

Final judgment:

Foreclosure is the most damaging option to your credit score and financial future. You should make every effort to avoid a foreclosure.

If you’re not ready for a short sale or deed-in-lieu of foreclosure, you may consider selling your house for cash. A cash offer can help you liquidate your debt quickly. Call us today to learn more about how much you could get for your home.

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