From the U-T:
When homeowners negotiate a short sale with lenders, they sometimes assume there will be relatively little impact on their scores. After all, the loan was successfully paid off, there was no foreclosure, and the lender voluntarily agreed to accept a lower balance than was owed.
But in fact, according to VantageScore researchers, short sales can trigger big drops in scores. Sarah Davies, senior vice president of analytics, said a homeowner who previously had an excellent score of 862 might plummet 120 to 130 points immediately as the result of a short sale.
While it’s true the lender may lose less money through a short sale compared with a foreclosure, Davies said in an interview, “it’s still a derogatory event.” The full debt was not repaid. The lender lost money. Scores tanked.
What happens when borrowers walk away from their mortgage debts altogether, the “strategic defaults” that have become commonplace in some large markets, especially in California?
They can count on 140- to 150-point immediate hits to their scores, plus negative marks on their credit bureau files for up to seven years.
People who file for bankruptcy protection covering all their debts — the mortgage, credit cards, auto loans, etc. — get hit with declines that are the scoring equivalent of a nuclear bomb: an average 355- to 365-point collapse in their scores. Bankruptcies remain on borrowers’ credit bureau files for 10 years.