Effects of Short Sale & Foreclosure on Your Credit Report

A short sale is one of the methods homeowners use in order to avoid a real estate foreclosure. Sometimes short selling the house is the best way out of a real estate foreclosure. One of the main reasons people chose a short sale is that they cannot afford to keep their house regardless of any payment plans offered by the lender. The advantage of opting to short sale is that there is no costly and lengthy process of foreclosure. Moreover, the owner of the property can pay off his/her loan in an amount which is less than what he owes. Nevertheless, before choosing to short sell or foreclose, you should consider the effects each will have on your credit score.

A Short sale is a simple concept, when proceeds from the sale of the house are less than the amount the owner owes on the mortgage, a short sale occurs. Many lenders accept the sales from a short sale and relieve the borrower of his/her debt. By accepting the proceeds from the short sale they forgive the rest of what the owners of the house owes on the mortgage. This happens when the owner of the house is not capable anymore of paying his mortgage. However lenders are not always so anxious to enter into a short sale agreement, lenders would only enter into such negotiation if the home owner is several months late in his payments and a real estate foreclosure is looking inevitable. If you are still paying the mortgage or show promise of paying the debt in the future, the lender would not be interested in negotiating for a short sale. Another concern is tax. There is a difference between the amount of the tax on the original loan and amount of tax on the sale. The home owner may potentially be held liable for this difference.
A foreclosure will cause more damage in the house owner’s credit report. Usually, the score in the house owner’s credit lowers by 200 to 300 points.

However, the effect a short sale has on the home owner’s credit report is far less damaging compared to the effects of a real estate foreclosure. Typically, the losses in the credit scores range from 80 to 100 points. When the owner chose foreclosure will have to wait up to three years before he could buy a new home at a fairly good interest rate. Whereas, a home owner who chooses a short sale option will only have to wait 18 months to buy a new home.

In deciding whether to choose foreclosure or a short sale one should always think about the possible effects each option will have on their credit score.