Short Sale or Foreclosure? (FICO & Credit Report)

Protecting your credit is one reason why homeowners try to short sale instead of letting their homes be foreclosed on. Yet most homeowners don’t know the real impact of a short sale – How much are they really helping their credit scores?

Short Sale vs. Foreclosure (FICO score impact)

A short sale is usually reported as a “Pre-Foreclosure in Redemption Status” on your credit report. Sometimes it’s reported as “paid less than owed” or “paid in agreement.”

According to Fair Isaacs, the company which created and maintains the FICO credit reporting system, a short sale will generally ding your credit score by 85 to 160 points. If you have a 600 credit score (about average) your credit will drop to 515 to 440 and you would likely be considered a credit risk.

The short sale itself is reported separately from late payements. In other words, if you’re 90 days late on paying your mortgage, that’s a separate entry than short selling your home. Often times the late payment entries can have a bigger impact on your credit than the short sale itself.

Short Sale vs. Foreclosure (credit report impact)

A short sale may impact your credit by 85 to 160 points, while a foreclosure could impact your credit score by 200 points or more. If you were current on your payments you may qualify for a Fannie Mae backed loan within two years. You have a decent chance of being able to buy another home if you’re in a better financial situation in two years. On the other hand, if your home is foreclosed on, you can expect to wait at least 5-7 years before you can even think about purchasing another home.

If you want to purchase another home in the future, then do everything you can to avoid having your home go to foreclosure. Although the FICO impact is similar, your FICO score is not all that lenders look at when looking at your credit report. The difference between your credit reports saying “paid less than owed” as opposed to “home foreclosed” is vast.

In Short…

A short sale will not “save your credit” in the sense that it will completely prevent your credit report from taking a hit. On the other hand, the impact of a short sale on your credit report is far better than letting the home go to foreclosure.

If you realize that you’re not going to be able to pay for your loan, contact your lender immediately. It’s much better to contact them early and let them know you’re having financial hardship, rather than wait until later when you’re months behind on your payments.

Finally, don’t do this alone: Facing foreclosure is a scary thing. Negotiating with a lender can be intimidating. There’s no benefit to doing it alone – Unlike a FSBO, no matter how much you short sell the home for, you’re not going to keep a dime. So get someone to help you – Someone who can really guide you through the process smoothly.

Looking for a confidential consultation? Contact us today.