Is a short sale less harmful to my credit score than a foreclosure?

Is a short sale less harmful to my credit score than a foreclosure?

English: Sign of the times – Foreclosure (Photo credit: Wikipedia)

Is a Short Sale Less Harmful to my Credit Score than a Foreclosure?

A short sale or a deed in lieu of foreclosure is just as harmful to your credit score as a foreclosure is.  Just how harmful depends on a variety of factors, the most important of which is how high your score was to begin with.

How a Future Lender Sees It

It’s possible that a future lender may see the short sale in a more favorable light than they would an outright foreclosure, particularly if there is no record of a deficiency balance.  The answer to the question Is a short sale less harmful to my credit score than a foreclosure? is a conditional yes.  Considerable damage to the credit score in the form of a series of late payments has already been done by the time the owner has to sell short.

Further Considerations for Is a Short Sale Less Harmful to my Credit Score Than a Foreclosure?

Those who are forced into these situations have already done considerable harm to their credit scores and face a re-building process of some duration.  Focus and discipline will get the consumer back on track as the old problems age.  Age lessens the impact of negative entries at the same time that a new track record of timely payments begins to emerge.

If your FICO was 680 a short sale with a deficiency balance reported will knock you down to 575-595.  If your FICO was 720 the same short sale will knock you down to 570-590.  If your FICO was 760 you will fall into the 540-560 range.  When the original score was 680 it will take the consumer about 3 years to get back there.  Those with the 720 and 760 scores will not enjoy such a fine score for another 7 years when the short sale falls off the record by age.

FICO, the most widely used credit scoring model, gives these forms of mortgage default the same weight when determining the future risk a borrower represents.  As important as the FICO score is there are other considerations that lenders take into account before giving borrowers the green light.

As of June 1, 2012 a short sale will be considered neutral for those few people who do this without having been late on their mortgages if they otherwise have a stellar payment history.  If you are one of these few don’t sign unless the words “loss” and “write off” are taken from the paperwork.

Having just emerged from this situation, the consumer will need some time to position themselves to be eligible for a new mortgage.  Saving for a substantial down payment is critical to getting a new chance at home ownership.  Increasing your equity position goes a long way to making a loan attractive to a lender.

It’s always better to negotiate the short sale than to just let things happen without cooperation.  Is a short sale less harmful to my credit score than a foreclosure?  A conditional yes.  You will also be able to buy another home a lot quicker usually in 2-3 years.  Some employers will discriminate against applicants with foreclosures on their record but not against a short seller who honored their obligation as best they could.  There’s also the embarrassment factor.  In some states the auction is held on the front lawn of the property.

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After practicing law for 37 years Edward F. St. Onge, Sr. now devotes all his time to helping consumers achieve a high credit score with amazing speed. Learn the counter-intuitive secrets to credit scoring through his down to earth instructions backed by extensive knowledge of the laws and trends. All of the latest tricks and techniques that they don't want you to know now at your disposal. At last a level playing field for the consumer!

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