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The Effect of a Short Sale Vs. a Foreclosure on Credit Scores

April 19th, 2011 · 2 Comments · Credit Bureaus and Scores, Mortgages

by Kristy Welsh

(Last Updated On: April 19, 2011)

I’ve heard many people say that a short sale is much better for your credit than a foreclosure. I’ve heard people say a short sale only stays on your credit for 3 years. Neither statement is true. A short sale is a black mark that stays on your credit for 7 years, just like a foreclosure. As a matter of fact, it is treated on your credit like a foreclosure.

So there’s no difference in the harm to your credit? Well, it depends. In a foreclosure, obviously, you’ve stopped paying on your loan and will have potentially many months of delinquent payments. In a short sale, let’s say you’ve made all your payments on time and then the bank accepts the short sale as paid in full. With a short sale, you’ll only have a “debt settled for less than owed” on your credit. This is a black mark, but it’s better than a foreclosure with an outstanding balance. This is the difference in the hit to your credit, not whether the foreclosure is a “short sale” or not.

If you’ve truly made all of your payments on time during the time you are short selling the property, you will obviously have fewer late mortgage payments on your credit report than a in foreclosure situation, which greatly helps your credit. However, the reality is that many people stop paying on their mortgage as soon as they decide they are going to short sale their property. In the case where the short seller stops paying on their mortgage, the hit to their credit report is very close if not equal to the negative effects of a foreclosure.

The Fair Credit Reporting Act says does not differentiate currently, nor is it likely to in the future, about how a short sale is reported vs. a foreclosure on your credit report. It falls into the delinquent mark category and all delinquencies other than bankruptcies are reported for 7 years. (Bankruptcies are reported for 10 years.)

There is one more favorable aspect of a short sale over just a foreclosure. In a short sale, the bank agrees to take less than the full amount of the loan as paid in full – so they can’t come after you for the difference between what the house sells for and the balance of the loan.

In a foreclosure, the bank will take back the property and sell it for whatever price they can. Since foreclosed homes are typically unoccupied, they are frequently vandalized or cannibalized for copper piping, air conditioning units and other appliances. The bank most likely will have to sell the home at a drastically discounted price. The difference could amount to tens or even hundreds of thousands of dollars.

It’s always a good idea to attempt a short sale rather than let your home go into foreclosure.

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2 Comments so far ↓

  • Staysha

    Arictles like this are an example of quick, helpful answers.

  • sgfl

    First, THREE mortgage payments must be missed before presenting a shortsale offer to any bank so it isn’t that people “decide” to stop making payments, it’s a requirement – so there goes your credit. Second, there are several websites that will give you the statute of limitations on collecting the shortage resulting from a shortsale. In most states it’s 3-5 years but in a few its 10. The only “forgiveness” is that thru the end of 2012 the fed gov is not counting the shortage as income to you for tax purposes. If you sold your home for $40K less than owed, the bank can come after you for the $40K and, under normal conditions, the gov counts it as income to you and taxes you on it. Maybe the gov will extend it but for now, only thru 2012. So 2013 shortsales will have income tax on the shortage. Mine took 8 months for the bank to decide whether or not to accept the offer and will finally close next weed (5/29/12). My credit is ruined the same as foreclosure, too.

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