What Will Hurt Your Credit more?

This is a question that I get all the time as a loan officer here in Arizona and despite the different laws in different states regarding the affects that a foreclosure or short sale can have on you personally,  the basic ramifications of the two are somewhat cut and dry when it comes to your credit.

The Drop-  This is the key to understanding what can happen to your credit with either one of these scenarios.  The rules for a foreclosure or a short sale are that you will take a hit of about 200 points with either one.  I have read conflicting reports that say a short sale will impact your score less than a foreclosure and I have heard that they are exactly the same.  Either way they are pretty close in how they affect your credit. 

Somewhat?- here is where the somewhat comes in to play.  FICO keeps their credit scoring models as about as secretive as Coca Colas secret recipe.  Fico gives you about the same amount of information as a can of Coke will give you on how it is made.  What will affect your score will depend on where you are currently at.  If you have a 750 plus credit score you can plan on seeing a possible drop of 150-200 points however if your credit is already lacking and you are sitting around 650 you may only see a hit of 85-105. Now if you are in the low 500's the impact will have even a less effect on your credit.  The problem is, most people who go into foreclosure or have a short sale have late payments pulling their score down to begin with so even that has to be taken in to account.

Why Not Modify?Home loan modification has been a route many consumers have turned to.  Last year FICO announced that at the current time there would be no change in credit scores when modifying until they had at least 1 year to understand the patterns of those modifying their mortgages.  I guess the honeymoon is up because I have started reading articles where those who have modified their mortgages have seen their scores drop up to 100 points. The reasoning behind this is due to the borrower not fulfilling the credit obligation as originally agreed upon in the beggining.

When it comes down to it plan on taking a bigger hit for the foreclosure and short sale than with the modification.  Don't forget that the late payments on your mortgage that comes with all these options will bring down your credit even further.

For any of you seeking advice whether to foreclose or do a short sale on your home contact a local attorney who can give you the laws in your state.  The above information is not legal advice in any way or form.