Conflicting Information
It used to be that lenders wouldn’t even consider a short sale if your payments were current, but that has changed. However, often, lenders will typically be more willing to negotiate if your payments are in arrears. So is it better for your credit to do a short sale over a foreclosure?
There seems to be conflicting information on how a short sale affects your credit as opposed to a foreclosure. One recent article stated that a short sale can affect your credit score by about 100+ points while a foreclosure changes it by about 150+ points. Keep in mind that your credit score is affected by late payments and delinquency on your mortgage as well as a short sale or foreclosure. Other sources argue that the affect of a short sale is identical to that of a foreclosure. In fact, Fair Isaac Corporation indicates that the average points lost on a FICO score are 85-160, whether a seller short sales or their property goes into foreclosure.
Long-Term Advantage
One thing everyone seems to agree on is that the main difference between a foreclosure and a short sale on your credit is realized in the future. According to current Fannie Mae guidelines, you can purchase a home again 2 years after a short sale whereas with a foreclosure, it can take up to 5-7 years. So if you want to purchase a home again in the near future and qualify for lower interest rates, a short sale is a viable option. In Arizona for example, it would be prudent to do a short sale as opposed to foreclosure if you want to take advantage of the low market prices in the Phoenix area over the next few years. There are even loan programs available that allow you to purchase a home almost immediately after short selling, with some reasonable requirements. It’s a good idea to check with a loan officer on the specifics.
Typically, as soon as your short sale closes, your credit score begins to recover. Assuming your other credit lines are strong and paid on time, with a short sale you could possibly notice a positive change in your credit score within a few months!
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Thanks for the info. Always have been a bit confused by the credit score in a short sale. I’d love to hear more about that. I found a great short sale calculator that I’d like to share here if anyone is interested. Looking forward to the ebook.
This is a great explanation. Most people will in fact begin to recover within several months. It has been my experience that people who voluntarily go into foreclosure just have not been well advised of everything. Consumers really need to get better educated as to all of their options and what is really best for them and their own situation.
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