What does a foreclosure do to your credit score?

The higher you start, the steeper the fall to the bottom. New research from credit-scoring company FICO shows that this axiom is especially true when it comes to how real-estate woes affect your credit score. FICO ran simulations on hypothetical scores of 680, 720 and 780 to figure out what happens to a score when a mortgage is late, when the homeowner enters into a short sale or is foreclosed on.

When to walk away from a mortgage

If you start with a score of 780 — a number that's well into the range of being able to qualify for most lenders' best rates — and pay your mortgage 30 days late, that 780 drops by 90 to 110 points. If you started with a score of 680, though, you'd only see a 60 to 80-point decrease.

A short sale with a deficiency balance and a foreclosure both have the same effect on your credit score. Of course, there are other reasons for wanting to avoid foreclosure. As some of the commenters on the FICO website pointed out, having a foreclosure in your past — even from years ago — may lead lenders and even employers from flagging you as a credit risk. From a credit-scoring standpoint, though, it's all the same.

A short sale, deed-in-lieu of foreclosure, or settlement in which the lender agrees to take whatever the house will sell for and write off the balance is a better option, score-wise, but whether or not the bank holding the mortgage will go for that is an open question.

A handful of states won't let a lender go after a homeowner for the difference, but most do. The states that bar this practice are Alaska, Arizona, California, Iowa, Montana, North Dakota, Oregon, Pennsylvania, South Carolina, Washington and Wisconsin.

When it comes to bankruptcy, starting out with a high score gives you a little bit of an edge, but not very much. If you started with a 780, a bankruptcy will turn that into 540 to 560, while it drops a 680 score to between 530 and 550. Recovery also takes less time for lower scorers; of course, this is primarily because they're working to reestablish a lower baseline. It takes three years to bounce back from a foreclosure if you're aiming to reclaim a 680; to restore a 780, you're looking at a seven-year wait.

You can see the full results of the research here.

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