Most of you reading this will be more than familiar with the term \”foreclosure\”, simply because it\’s being used more now in everyday language more than it ever has before in the history of the United States. We can thank the global economic crash of 2007/2008 for this, but just to clarify a foreclosure is when your bank or mortgage lender repossess your home for missing payments on it. A short sale is where you\’ve agreed with your lender or mortgage company to sell your property for less than it\’s worth to prevent them from having to foreclose on it in the first place.
What you might not realize is that short sales have been in existence for just as long as the foreclosure process, but the only reason you\’re hearing more people discussing short selling right now is because banks want to avoid having to foreclosure on the majority of their property portfolio – there\’s less of a negative connotation to short sales when compared to foreclosures.
The big question people have in relation to short sales versus a foreclosure is how they affect your credit score afterwards. After all you might want to buy another home when your finances are in better order, so the last thing you want is a poor credit rating ruining your chances of doing that. After all you\’ll have to live with the consequences of foreclosing or short selling for several years to come.
One of the biggest myths surrounding the idea of short sales is that it has no impact on your credit score – that\’s not entirely true. As with most things in life the devil is in the details, and it will also depend on your individual financial circumstances too.
When you look at how a foreclosure is reported to credit agencies it\’s simply listed as \”foreclosure\” whereas a short sale can be reported using any of a number of different terms. This leads most people to believe that a short sale isn\’t reported to a credit reporting agency, meaning that people will then believe that using short selling leaves your credit rating intact.
What actually happens with how your credit score is calculated is that the agencies involved look at your overall financial history, including things like how often you\’re late with paying your bills, your total debt, the length of your credit history, and other such factors. This means that although a short sale of your home might not immediately affect your credit score in a negative way, you can be sure that it won\’t go unnoticed as part of your overall poor financial standing.
So your assumption right now is probably that having the bank foreclose on your home is far worse than having to short sell your home, right?
In reality they both have the same overall effect on your credit score in that they\’re both a very clear indication that you are currently living beyond your financial means.
To clarify this with some numbers you\’ll lose between 85 and 160 points off your FICO score for having your home enter into the foreclosure process, but you\’ll also lose between 85 and 160 points if you have to short sell your home.
The lesson to be taken away from this is that there are no easy ways to deal with a delinquent mortgage except for having a better handle on your personal or business finances in the first place.