Q: How does a short sale affect a homeowners’s credit score as compared to a foreclosure?
Maria in Everett, WA
A: 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.
If the homeowner is 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 the borrower’s credit report after a short sale, and lessens the impact on the borrower’s credit rating. Credit bureau reporting of HAFA transactions where the deficiency is forgiven is now to be reported as “Paid or closed account/zero balance” or “Account paid in full/a foreclosure was started”, as applicable. A short sale is usually reported as “Account paid for less than the full balance”, or similar statements which have a negative affect on the homeowner’s credit score.
Some people feel there is a much stronger social stigma attached to foreclosure as compared to a short sale. With a short sale, the homeowner is in control of the sale, not the bank. In fact, today cash incentives may be available to homeowners who decide to do a short sale instead of foreclosure. When the consumer wants to buy a home in the future, more opportunities will be available to them sooner if they do a short sale. For example, contrary to popular belief, one can be current on their payments and still do a short sale. And if a homeowner is current on their mortgage through a short sale, they can qualify for an FHA loan without any waiting period. The same option is not available following a foreclosure.
Every homeowner’s situation is different, so we always recommend speaking with a real estate attorney who can offer advice on the legal and tax implications for each individual’s circumstances. Washington Property Solutions offers free attorney and CPA consultations as part of our service. Call us at 425-381-2233 and we can refer you for a consultation.