A foreclosure, short sale, loan modification or deed-in-lieu of foreclosure can all have a negative impact on your credit. Many times a bank will force you to go behind before they will consider a short sale. There is a difference in the severity of the damage between them. A foreclosure will show on your credit as a foreclosure/repossession whereas a short sale will show as pre-foreclosure in redemption status, settled or even as a completely satisfied account. A foreclosure can prevent you from purchasing a home for 5-7 years whereas new Fannie Mae and Freddie Mac guidelines have changed the seasoning of a short sale to 2 years - which means you can purchase a home much sooner.
Jobs that need security clearance may be impossible to get with a foreclosure on your record. When looking for a new job an employer may pull your credit report and this may make you look bad to have a foreclosure on your record versus a short sale. Short sales show that you tried to minimize the damage to the bank.
Foreclosures also generally have a more severe impact on your FICO score, because of the high number of missed payments that people accrue over the course of their foreclosure, most people report a drop of 200-300 points in their score. If you are proactive about short selling your home, you can reduce this number by acting quickly to get your home on the market and sold. Most people who complete a short sale report a drop of 80-120 points in their credit score and some have been able to fully recover in as little as 12-18 months.
The short sale process is far more invasive and is less stress in most cases on the homeowner. Friends, family and neighbors do not need to know you are doing a short sale on your property and your property will be marketed just like other home for sale. When the property closes escrow, you will move out and move on with your life. When your home is facing foreclosure, the bank generally posts a notice of trustee sale on your property. If the property does go to foreclosure and you or a tenant is living in the home there will be an eviction process and you will have someone knock at your door to try to get you out of the home.
A short sale allows you to get out of a home that is causing you a financial hardship and rid you of the debt associated with negative equity without facing foreclosure. We highly recommend that if you are considering a short sale you meet with a professional as soon as possible to reduce the impact on your credit and begin the negotiations with your lender.
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