How Short Sales and Foreclosures Affect Your Credit Rating

If you’re in a financial pit and weighing your options, you might want to start thinking about a short sale or foreclosure, and consider how each will impact your credit score. Ideally you would want the option that will do the least amount of damage to your credit rating.

Depending on State laws, a debtor may stay in his or her foreclosed home anywhere from four months to a year without paying anything – while this may be desirable to some, it does not necessarily make foreclosures more preferable to a short sale.

In a short sale, the home is offered up for sale and listed in a multiple listing service. Interested buyers may make appointments to see the house and most will bargain for a really low price. If you hire agents, these agents can hold open houses for prospective buyers.

In other words, someone who chooses a foreclosure may live a life uninterrupted by home viewers for up to a year. Someone who chooses a short sale will have to live with the open houses and the scrutiny of potential buyers.

What exactly is a short sale?

A short sale is an amicable agreement between the lender and the debtor when the lender agrees to accept the home as payment for what the debtor owes him or her. This usually means that the property is also sold for less than what it is really worth because the urgency of the sale is more important than getting the correct value of the asset. Usually, the lender only agrees to a short sale because there is no other way for the debtor to pay off his or her debts. Not all lenders will agree to a short sale, but it will greatly help your case if you contact a real estate agent to try and negotiate a short sale with your lender on your behalf.

Many homeowners with underwater mortgages choose a short sale over a foreclosure because the damage to their credit scores is significantly smaller. Keep in mind that not all lenders will be agreeable to this set up; especially if they see that your house payments are up to date. Should your payments be in arrears you will have a better chance at having your lender agree to a short sale. You must also remember that if your lender knows of any cash assets you have, they may try to tap into those funds on top of the short sale profits.

The reality behind credit scores

A recent study done by Fair Isaac showed that there is not much difference in the credit damage done by a short sale and a foreclosure unless the lateness of the payment (in a short sale) is not that bad. If you’re just a month behind from your payment, for example, it would benefit you to try to have a short sale. However, if you’re already 90 days late or more, you will suffer from the same credit damage as you would should you let your home be foreclosed.

A huge advantage of short sales over foreclosures is that you can apply for a home loan two years after your short sale. These are institutional loans only, though, and it’s a myth that people can purchase homes through private bank loans after two years. To be on the safe side, seek the legal advice of a tax professional. Have your credit scores computed. Each foreclosure or short sale case is unique depending on the lender and your State laws.

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