The Impact of Short Sales and Foreclosures on Your Credit Score

Should you find yourself in a difficult financial situation where you cannot afford to cover your mortgage payments and you no longer have equity in your home, a short sale may be an option to avoid foreclosure on your property. A short sale occurs when a homeowner sells the property for less than it actually sells for. This happens because the outstanding obligations against the property are greater than the true value of the property and therefore the homeowner owes the property more than what the property sells for. If this is your case and you choose to sell your home when the housing market is really slow or you have taken equity loans in addition to your mortgage loan, you may consider attempting a short sale. And if you eligible for this, it means that your lender agrees on accepting selling our property for a lower amount than the outstanding balance on your mortgage.

When the sale is completed, you will still be liable for the difference between the original mortgage and the amount of short sale. For instance, if you originally owe $150,000 on your mortgage, but are only able to sell your property for $100,000, your lender has to agree on attempting a short sale for $100,000. If you find a buyer for $100,000 and your short sale is successfully completed, your deficiency balance is $50,000 and this is the amount you are liable for.

Although a short sale is a good alternative instead of letting your bank foreclose, still it affects your credit score. However, the credit implications of a short sale are less than those of a foreclosure. If the short sale occurs voluntarily and not because you are forced by your bank, it means that you are able to pay off the amount you owe by using assets you already own, meaning your property. In other words, you are not asking your bank for a new loan, but you are trying to sell you house even for less. Even if you take a loan to make up for the deficiency balance from the short sale, your credit score won't be more affected than it would be had you taken any other loan. In fact, it may even improve your credit score as the short sale will not come out as a foreclosure on your credit report.

On the other hand, if the short sale is forced by a foreclosure, your credit score will be severely affected. Based on the previous example, you originally owe $150,000 on your foreclosed property, but you only get $100,000 from the short sale. Your lender can sue you for the deficiency balance of $50,000 and you probably cannot cover this amount of money because if you could you wouldn't go for foreclosure in the first place. So, if you cannot cover the $50,000 and the bank sues you and you still cannot pay, your credit report will be negatively affected with a deficiency judgment. In particular, a foreclosure will affect your credit rating for 7 years and your credit score will be lower by 250 points. Moreover, you will not be eligible for a mortgage for at least 2 to 4 years.

Overall, a short sale will lower your credit rating, but the negative credit implications will be less than those of a foreclosure. Therefore, if you have the option of choosing between a short sale and allowing the bank to force you into foreclosure, it is wiser to choose a short sale to protect you credit score as much as possible.

Sources:

http://www.bills.com/effect-of-short-sale-on-credit-score/

http://www.mortgagefit.com/discuss/foreclosure-effectcredit.html