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Many homeowners we work with have questions about how a short sale may affect their credit score, and how that compares with the implications of allowing your home to go into foreclosure.
A short sale has benefits over foreclosure
Both will lower your credit rating, however there are many benefits to choosing a short sale over foreclosure. With a short sale, you are in control of the sale, not the bank. You may sleep better at night knowing who is buying your home, and you can spare yourself the social stigma of foreclosure.
Every homeowner’s situation is different, so we always recommend that you speak with professionals who can advise you on the legal and tax implications for your circumstances. Washington Property Solutions offers free attorney and CPA consultations as part of our service to you. Call us at 425-381-2233 and we can refer you for a consultation.
- You may qualify for cash incentives from the bank when you decide to do a short sale instead of foreclosure. We have seen cash incentives of up to $30,000 for homeowners doing short sales. These incentives are not available with a foreclosure.
- If you are participating in the federal government’s Home Affordable Foreclosure Alternatives (HAFA) Program, there are definite credit benefits to choosing a short sale over foreclosure. Recent changes to the HAFA Program dictate what the lender can state on your credit report after a short sale, and lessens the impact on your credit rating. This is not true of a foreclosure.
- While both a short sale and a foreclosure will lower your credit rating, a foreclosure may cause your credit score to drop by as much as 200 to 300 points. And that foreclosure normally will remain on your credit report for five to seven years, making it difficult or impossible to qualify for financing. The hit from a short sale is smaller – often as little as 60 points. And you may qualify for new financing in as little as 12 months after re-establishing your “satisfactory credit” standing.
- When you go to obtain a loan to purchase a property in the future, more opportunities will be available to you sooner if you do a short sale. For example, contrary to popular belief, you can be current on your payments and still do a short sale. And if you remain current on your mortgage through a short sale, you can qualify for an FHA loan afterwards without any waiting periods. The same option is not available following a foreclosure.
- With a short sale, you are in control of the sale, not the bank. You may sleep better at night knowing who is buying your home, and you can spare yourself the social stigma of foreclosure.
How your credit score is calculated
FICO® scores are the credit scores most lenders use to determine your credit risk. They affect how much a lender will loan you and what interest rate they will charge. You have three FICO scores, one for each of the three credit bureaus: Experian, TransUnion, and Equifax. Each score is based on information the credit bureau keeps on file about you. As this information changes, your credit scores changes as well. You can find more information about how your FICO score is calculated and contact information for the three credit bureaus [PDF].
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Washington Property Solutions
Windermere Real Estate /East Inc.
11100 Main Street, Suite 200, Bellevue, WA 98004