Foreclosure or Short Sale?

FORECLOSURE OR SHORT SALE?

Sellers may wonder whether doing a short sell would affect their credit less than completing a foreclosure, and whether there are other advantages between the two. While in foreclosure, and depending on state laws, a seller could possibly stay in the property, essentially rent free, for four months to a year before being forced to vacate. But that fact alone does not mean a foreclosure is better.

Whereas a short sale involves offering the home for sale, generally listed through MLS. Potential home buyers will make appointments to see the house, agents might hold open houses and, in general, a seller's life will be disrupted, all in the hopes that a buyer will buy the home.

SHORT SALE BASICS

Short sales happen when a lender agrees to accept less than the amount owed against the home because there is not enough equity to sell and pay all costs of sale. Not all lenders will negotiate a short sale, and that is why a real estate agent or a lawyer can be a tremendous help by contacting the lender's loss mitigation department to find out.

Selling your home as a short sale is a complicated process. It used to be that lenders wouldn't even consider a short sale if your payments are current, however the situation has changed greatly. One must understand that lenders will be more agreeable to negotiation if your payments are in arrears. If you have cash or liquid assets your lender may try to collect these funds from your accounts.

HOW DOES A SHORT SALE AFFECT YOUR CREDIT?

Fair Isaac released a report that says credit scores are affected about the same, whether a seller does a short sale or foreclosure. Fair Issac says the average points lost on a FICO score are as follows:

30 days late: 40 to 110 points

90 days late: 70 to 135 points

Foreclosure, short sale or deed-in-lieu: 85 to 160

Bankruptcy: 130 to 240

Foreclosure or Deed-in-Lieu of Foreclosure

Both of these solutions affect credit the same. Sellers will take a hit of 200 to 300 points, depending on overall condition of credit. This means if a seller's FICO score before foreclosure was 680, it could dip as low as 380.

Short Sale

Some agents say the good news for short sale sellers is the wait is much shorter before buying another home, and Fannie Mae guidelines in 2008 adopted new procedures.

Foreclosure or Short Sale Decision

If you're a seller trying to decide whether to let a home go through foreclosure versus attempting a short sale, salvaging your credit may not be an advantage to doing a short sale. Reports indicate that according to Score Factor Code #22, there's no credit score advantage for a delinquent borrower on a short sale over a foreclosure.