How is my credit affected: Short Sale vs Foreclosure

Credit Impact: Foreclosure vs Short Sale

How is my credit affected: Short Sale vs Foreclosure

In today's market, many homeowners are faced with the decision to try a short sale or just let the property go to foreclosure. Below are some points to think about / share with your clients.
If you have questions on whether missing mortgage payments and selling your property for less than the full amount you owe on it(short sale) will hurt your credit score, the answer is yes. HOWEVER, the credit damage done by a short sale is significantly better than a Foreclosure or Deed in Lieu, the short sale does not show up as long nor is the impact as severe as a property foreclosure.
Take a look at some of the most common questions….

1) When will I be able to purchase another house? (Primary Residence)

Foreclosure: Homeowner is eligible for re-purchasing a primary residence in 5 years

Short Sale: Homeowner is eligible for re-purchasing in 2 years

2) When will I be able to purchase another property? (Investment Property)

Foreclosure: Homeowner is eligible to purchase an investment property after 7 years

Short Sale: Homeowner is eligible to purchase an investment property after 2 years

3) Future loan disclosure: Will I have to disclose what happened with my house?

Foreclosure: On any future 1003(mortgage) loan applications when they ask, “have you ever had a property foreclosed upon…” you will have to mark YES, affecting what programs will be available to you and interest rate that you would qualify for.

Short Sale: There is no similar disclosure required for a short sale

4) How will my Credit Score be affected?

Foreclosure: The credit impact of a foreclosure is MAJOR and can reduce your credit score anywhere from 250-300 points.

Short Sale: Only late/missed payments on the mortgage will show up as derogatory items on the credit report. After the sale is completed the mortgage will be reported as paid or settled. Short Sales can affect your score differently depending on how many payments are missed, sometimes as little as 50 points. A short sale will have an affect on your score for approximately 18-24 months.

5) How will my Credit History be affected?

Foreclosure: A foreclosure will remain as public record on a homeowner’s credit history for 10 years, sometimes even longer.

Short Sale: Short sales are currently NOT reported in the credit history of a credit report. The loan is generally reported as “paid off, settled”

For all the information on Fannie Mae's guidelines, go to...

If you would like Free information on Short Sales, please contact me anytime.

What are you noticing in today's short sale / foreclosure market?

To your success,

Oliver Graf

Real Estate Expert
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  1. In short sale..! seller is upside-down on his or her mortgage and is attempting to negotiate a deal with the lender in the hope of avoiding foreclosure.

  2. Sell your house as a short sale, while not ideal, is a much better alternative to go the route of foreclosure.

  3. Both short sale and foreclosure have negative affects on a homeowner's credit scores. A short sale will lower the homeowner's credit score by 75-100 points whereas a foreclosure can lower credit score by 250 points. Thus, short sales are considered less damaging compared to a foreclosure. Check out a discussion on how "pre foreclosure sale affect credit" and how the borrowers can negotiate for a pre foreclosure (short) sale.

  4. Both short sale and foreclosure have negative affects on the credit report of the consumers. A short sale reduces the credit score by 80-100 points whereas a foreclosure reduces the score by 200-250 points. Apart from this, like any other negative item, short sale or foreclosure will remain on the consumers’ credit report for the next 7 years and it will affect their chances of qualifying for a loan in the future. If the consumer goes through a short sale, then he or she’ll have to wait for 2-3 years to get a mortgage. If the consumer goes for a foreclosure, then he or she’ll have to wait for 3-4 years in order to qualify for a mortgage.