IT’S A BATTLE OF SHORT SALE VS FORECLOSURE
HOW DOES IT AFFECT YOUR CREDIT SCORE & ABILITY FOR FUTURE FINANCIAL FREEDOM?
You’ve lost your job, getting divorced, decided to buy a nice car and can’t afford the house payment. Don’t worry, you aren’t the only one.
What do you do now? Short sale or foreclosure? Which one affects your credit score more?
There is no straight forward answer, every situation is unique. Without a doubt, the impact of a short sale on an individual’s overall credit is less severe than a foreclosure. With a foreclosure, a potential homeowner must wait 5 years to get a conventional mortgage. With a short sale, the waiting period is only two years. For FHA financing, an individual must wait three years to get mortgage financing after a foreclosure or a short sale (where they were in default at the time of the short sale). However, if the homeowner was current at the time of short sale there is no waiting period for a new FHA mortgage (as long as the homeowner can verify that he/she did take advantage of declining values or purchase a home at a reduced price of similar or superior quality). Most homeowners are delinquent when they start the short sale process, but this is very good news for those that are current and get a short sale approval.
What does a short sale do to your credit score? For those delinquent when they apply for a short sale, it’s really those mortgage late payments that end up adversely affecting the homeowner’s scores—not the short sale itself. If the mortgage is paid on time throughout the process and the short sale gets approved, then the credit report will simply show “Paid as Agreed, Settled for Less” (as long as the deficiency is forgiven). This by itself should only affect the credit score nominally. There are so many factors that go into a credit score that there is no way to determine “how many points” your credit score will suffer.
Will a short sale affect a person’s ability to get financing in the future? Yes. However, it is a better alternative than a foreclosure—especially for those that have been able to maintain a clean mortgage history.
Jaime Patocka is Boise Premier’s Short Sale Specialist. Since 2001, she has been guiding individuals through this difficult time.
Confused? Have questions for Jaime?
Jaime@BoisePremier.com
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