Foreclosure vs. Short Sale: How is Your Credit Score Affected?

MAR 29, 2012

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When weighing your options when it comes to a short sale or foreclosure, do you know how each impacts your credit and your ability to purchase another home in the future? From how your credit score is impacted to other consequences of each, compare foreclosure and short sale: how is your credit score affected?

Foreclosure vs. Short Sale

When you are unable to honor the terms of your mortgage agreement, you may contemplate approaching your lender to agree to a short sale or letting your home go into foreclosure. With your lenders approval, a short sale allows you to sell your home for less than the remaining balance owed on your loan. In some cases, the lender may also agree to forgive the remaining debt owed. However, not all lenders will agree to a short sale and may opt to undergo foreclosure proceedings instead.

On the other hand, foreclosures ensue when the lender or bank takes ownership of your home after falling seriously delinquent in your mortgage payments and you are unable to pay your home loan.

How Your Credit Score is Impacted

There is a common assumption that a short sale will cause your score to drop less than a foreclosure because the lender is not physically reclaiming ownership. However, the most important factor in how your credit score is impacted    by a foreclosure or a short sale is how late you are on your mortgage payments. In addition, the foreclosure or short sale mark on your credit report will make you ineligible to receive certain types of home loans, such as Federal Housing Administration (FHA) loans, for about three years.

Additional Penalties of a Foreclosure and Short Sale

When selling your home via the short sale process, you may be required to pay all — or a portion — of the remaining balance of the loan after the sale is complete. The lender may opt to forgive a portion of the remaining owed after your home is sold for less than you owe, but you may still be liable for the remainder. You may, however, be able to qualify for a loan with reasonable terms after about two years, credit experts advise. Although in a foreclosure you will not be liable for additional monies owed on the home once its handed over to the bank, however, buying another home may be two to six years in the future when you go down this path.

Althougha foreclosure and a short sale both impact your credit report and credit score, your long term goals and current financial status may help you find the best path for you. However, seek advice from a financial advisor and tax expert first before deciding which option is your best bet when you fall behind on your mortgage payments.