Credit Consequences of a Short Sale or Foreclosure

No one wants to think about losing their home due to foreclosure or a short sale, but it does happen. Some lending institutions would rather accept a short sale in order to avoid the foreclosure process. A homeowner may short sale their home as well to pay off the loan for less than what is owed. In either case there are repercussions to the homeowner’s credit.

How a Short Sale Affects Your Credit

A short sale is when the proceeds from the sale of a house are less than what the owner owes on the mortgage. When a seller goes through a short sale, they typically lose 50-100 points on their credit rating. A seller might wonder about their future homebuying power after a short sale. Even after losing some of their credit rating, a seller can typically buy another home in about two years and get a good interest rate. Only the mortgage payments that are late get reported when a homeowner undergoes a short sale.

How Foreclosure Affects Your Credit

In foreclosure, a homeowner will lose much more of their credit score than they do in a short sale. After foreclosure a sellers credit score will usually fall 300 points, and it typically takes up to ten years for a borrower to get a good interest rate again. It's required that foreclosures are listed on any credit application. If a homeowner has more than one foreclosing property, their credit can be damaged up to 600 points.

Ways Short Sales and Foreclosures Affect Your Life and Employment

Issue	Foreclosure	Short Sale
Jobs Requiring Security Clearance	A foreclosure can cause loss of security clearance or even the position.	Usually does not jeopardize security clearance.
Current Employment Problems	Employers can check credit records of employees in sensitive positions and foreclosure could cause termination.	Not reported on credit, so usually causes no employment problems.
Future Employment Problems	Foreclosure must be listed on applications and can cause failure to get the position.	Not on a credit report, so usually doesn't effect future prospects.
Deficiency Judgment	Bank has the right to file for Deficiency Judgment (unless in states with Deficiency Judgment laws).	Lender may be convinced to forego seeking Deficiency Judgment.
Amount of Deficiency Judgment	If the foreclosure does not sell at auction, it will sell at an even lower cost, and result in a higher deficiency judgment being filed.	Usually the home is sold closer to market value, so if one is filed, there is a lower deficiency judgment.

Foreclosure Vs Short Sale Future Loan Issues

Issue	Foreclosure	Short Sale
Primary Residence Fannie Mae Loan	Ineligible for 5 years.	Eligible after 2 years.
Non-primary Residence Fannie Mae Loan	Ineligible for investment loan for 7 years.	Eligible after 2 years.
Getting a Loan	Future rates will be affected after answering “yes” on 1003 where it asks if you have been in a foreclosure.	Question about short sale is not asked on a form.
Credit Score	Lowers by 250-300 points, which lasts at least 3 years.	Only the late payments are reported. Lowers score 50-100 points and affects may only last 12-18 months.
Credit History	Stays on record for 10 years or more.	Nothing shows up except that mortgage was satisfied.

What Can You Do?

If you have gotten into a situation where a short sale or foreclosure is the only option, you need to speak with a lending professional or short sale/foreclosure expert to figure out what steps to take next. They will guide you through the process and conclude what is the best course of action for you to take. Please contact our Certified Distressed Property Experts at Brazen Sotheby's International Realty to discuss your options, act before it's too late.

Phone us today at 425.454.4141, or send us more information and we'll contact you as soon as possible.