Credit Score

Credit Score Recovery Time from Foreclosures and Short Sales

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What's now a million-dollar question was only a 25-cent question yesterday, because everyone already knew the answer: How long does it take for your credit scores to recover from a short sale or a foreclosure? Years, right? These incidents remain on your credit reports for seven years and short sales are reported as either charge-offs or settlements. Those two events, as well as foreclosures, are all seriously negative and could significantly damage your credit scores for many years.

So why has this suddenly become a topic of debate, discussion, and conflicting answers? Because in March 23rd’s American Banker, Barrett Burns, the CEO of credit score provider VantageScore Solutions claimed, "…it can take borrowers as little as nine months to repair their credit score after a short sale or foreclosure."

Wow, that’s great news! Or is it? I found this difficult to believe, so I interviewed Craig Watts from FICO – credit score inventor, and VantageScore’s prime competition – to get the company’s input on how long it takes to repair your credit scores after such an event. Here’s the full transcript of my interview, unedited.

Ulzheimer: Is FICO willing to go on the record discussing the impact of a foreclosure and/or a short sale on a consumer’s credit score?

Watts: "FICO has consistently found that past payment history is the single most predictive category of information when we empirically develop credit scoring models using consumer credit histories. As an example, we recently looked at a sample of about 10 million credit reports representing a highly diverse U.S. population. We examined that group's most recent, twelve-month performance window. We found a default rate of 2.9% for the subset of all consumers with a clean credit record, and a default rate of 49% for the subset of all consumers who had had a recent foreclosure. In other words, consumers who recently experienced a foreclosure were about 17 times more likely to default on a credit obligation in the next 12 months than were people with a clean credit record. Obviously, recent credit defaults are vitally important when one is objectively assessing default risk."

Ulzheimer: How long does it take for a consumer’s score to recover after a short sale or foreclosure? And by recover, I mean fully recover.

Watts: "A consumer with a foreclosure or similar default on her credit report can expect her score to begin recovering after a couple of years if she consistently pays all her bills on time, keeps any credit card balances low, and takes on new credit only when needed. As the default event ages on her credit report its influence on her score will diminish, until the credit bureau removes the record from her file after seven years."

The bottom line is this: You can't fully repair your credit score in as little as nine months unless you can convince the credit bureaus to remove the items from your credit reports. And as long as the items are accurate they will remain for seven years. Your scores will begin to recover in time as the item gets older and older and loses predictive value, but unfortunately it won’t happen after only nine months.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on

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  • robert lowery

    When does the seven year wait begin.when the bank files court papers or after the property is sold?

  • Pingback: How Does A Short Sale Impact Your Credit Score? | Getting Real

  • John

    The response from FICO (Watts) addresses “foreclosure or similar default”. My understanding is that a short sale doesn’t necessarily fall under this category. If that’s the case, then what is the recovery period from a negotiated settlement where the balance is dealt with in the settlement?

  • Francisca Barrios

    i make an short sale in my property 2 years ago, i have a satisfaction mortgage , please let me know if i can eliminate this short sale the my credit.

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