The impact of short sales and foreclosures on your credit score
by Katerina Nikolas
Faced with the prospect of losing their home many people also worry about the negative impact it will have on their credit score. Despite current financial difficulties they often consider how either a short sale of foreclosure will limit their future ability to borrow money or enter the housing market again. Homeowners often consider their credit score as one of the factors determining whether they opt for a short sale rather than wait for a foreclosure.
There is quite a lot of misguided advice available regarding the differing impact that short sales and foreclosures carry related to the credit score system. Real estate agents often assure owners that short sales will have less impact on credit scores than foreclosures, without being in a position to determine this without being fully appraised of the overall financial situation of the owner.
The crucial difference isn't really in the immediate effect that a short sale or foreclosure makes to the credit score, but rather to the long term effect on the credit report. Foreclosures will show as such on credit reports for a minimum of seven years, and up to ten, and are viewed as only secondary to bankruptcy in the eyes of most lenders. It is possible to have a foreclosure removed from the credit reports after seven years, by sending a written request to each of the three main credit bureaus, TransUnion, Experian and Equifax.
A short sale will be registered in a different way on the credit reports determined by how the lender marks it. It may show up as a ‘settlement', which isn't good but has less long term damage than ‘foreclosure'. Alternatively lenders may mark it as ‘redemption' or ‘pre-foreclosure redemption' which carries less negative connotations.
In the case of both short sales and foreclosure the property owner will have missed payments recorded at 30 at 30 days, which reduce the credit score by 40-110 points. By the time default is reached at 90 days a further 70-135 points will be dropped, so already the score has decreased by between 110-245 points and there is no difference between the delinquent payers.
The negative drop will be influenced by other factors such as if other debts are also delinquent or are still being met on time. By the time default is reached both delinquent payers will be considered to be in breach of the agreed contract and their credit reports will record the accurate fact of ‘serious delinquency'.
Both short sales and foreclosures will cause a further hit to the credit score of between 85-160 points. Thus the potential drop in credit score can range from approximately 200 points to 400 points. However it is possible for the short seller to face a biggerdrop than the person foreclosed on if their total debt is delinquent or if the mortgage was the only debt. The variables are related to the overall credit burden of the delinquent mortgage payer at the time. Either scenario though will result in a significant fall in the Fico score.
However it is possible to re-establish credit within a year or two. Those who have sold short will be considered by most lenders as eligible for a new mortgage far sooner than those who went through foreclosure, as lenders take the total credit report findings into consideration, not just the credit score.
It is inevitable that anyone who finds themselves going through a short sale or foreclosure will suffer a high credit score hit which will take quite a while to rebuild.
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