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Short Sale vs. Foreclosure: The Impact on Credit

3 October 2008 by 41 Comments

This is an updated version of a post that I sent out earlier in the year:

I have gotten the impression from many real estate agents that they are unaware of the effect of a Short Sale on their clients’ credit report. The common belief is that a Short Sale isn’t as bad as Foreclosure or Deed In Lieu of Foreclosure.

I have argued with people about this and there is a lot of information out there with claims to the contrary. It scares me because I see a lot of lawsuits in the future regarding this.

Short Sales, Deed in Lieu of Foreclosure, or full blown Foreclosure are all weighted the same in determining credit score computations. This information comes directly from MyFICO.com. MyFICO.com is operated by the Fair Issac Corporation, the inventors of credit scoring. I have not stated this without extensive research. This is “straight from the horse’s mouth.”

Earlier this year, FNMA announced that a record of foreclosure on a credit report will require that three years must pass prior to placing a borrower into a FNMA insured loan. At the beginning of June 2008, that time frame was extended to five years. That is five years from the sale date.

Remember, that the home owner does have redemption periods after default and because of this, the sale date is the actual date of the foreclosure.  An owner wouldn’t necessarily know this without researching the actual date.

The Mortgage Bankers Association announced that one in every 200 homes with mortgages is facing foreclosure.  That is a lot of bad news to many families. This information was announced in June of 2008 and the news has become much worse as I write this in October of 2008.

The “Bail Out” bill now being reviewed again by the House of Representatives will give some “bite” to those of us who renegotiate for Loan Modifications. Loan mods are done for a home owner cannot keep up with the current terms of the mortgage. Changes can be negotiated and will keep you in your home.

I am bragging, but 18 months ago, I correctly predicted that short-refis would exist. They do now…..it is called Loan Modification or a “Loan Mod”. A new FHA loan to reduce the balance on home loans and make the payments easier was announced yesterday.

I have been able to help quite a few homeowners’ mortgages with awesome results! This new bill being passed will bring some order to the process and make it easier to accomplish.

If I had my home on the market because of a bad loan, but felt I needed to sell when I really wanted to stay. If I found out that my agent said a short sale wouldn’t hurt me as badly as foreclosure the I would have me gunning for someone to pay.

I would rather it wouldn’t be you. You the seller or You the agent who passed on information that will cause serious harm.

Thanks for reading.

 

  • http://www.pushingdirt.com Christopher B. Kubler, CCIM

    We’re increasingly seeing distress, and resulting short sales, on the commercial side. Could be the next shoe to drop.

    Great site!

  • http://www.yuckyhouseleads.com/blog/ Seanster

    Foreclosure and short sales can affect your credit rating. This may put you on a high risk for another mortgage. Please visit my website.

  • http://eshortsales.net Susan

    How many short sale properties do you think will be taken off the market to consider a loan mod (due to the bailout) or do you think it’s too late for them if those properties are currently on the MLS?

  • Mary Supinger

    Just about any agent would understand wanting to preserve your home, so I wouldn’t expect it to be a problem unless you had an offer pending on the property.

    I think with the “Bailout Bill” being passed today, loan modifications will become easier to get and a better deal for the home owners.

  • Mary Supinger

    Thanks for writing Christopher.

    I didn’t realize that the commercial side had begun suffering too, but it makes perfect sense.

    The next five years will really show what kind of people we are as Americans.

    The professionals in the field now will need experience and the ability to bring that experience to the best use for our clients!

    Mary

  • http://www.CurbviewJasper.com Trent

    Mary,

    Is there a difference in how a short sale vs. a foreclosure affects the ability to obtain a new mortgage, other than in the credit score itself?

    You mention above FNMA has a 5-year restriction on loan placement following foreclosure, but what of short sales? How are they penalized?

    Thanks for raising a very important topic!

  • Mary Supinger

    Hi Trent:

    Thanks for writing!

    It will depend entirely on how the reporting is handled by the lender. They could report “Settled for less than the amount owed” which will have a horrible effect on your scores, but if the word foreclosure is not on there, the five year period MAY not apply.

    It is important to note that the word MAY is in that verbiage. The rules are changing weekly and this could become a big problem in the coming months.

    Thanks for your input. I appreciate it!

    Mary

  • Anonymous

    Excuse me but I really didn’t get the point you were making in regards to foreclosure vs. short sales damaging credit ratings. Please explain

  • Mary Supinger

    Short Sales, Deed in Lieu of Foreclosure, or full blown Foreclosure are all weighted the same in determining credit score computations. This information comes directly from MyFICO.com. MyFICO.com is operated by the Fair Issac Corporation, the inventors of credit scoring. I have not stated this without extensive research. This is “straight from the horse’s mouth.”

  • http://www.first-house.info/ First Time Home Buyer

    I am currently in the market for a property but I’m not sure right now is a good time to buy. I’ve been looking at short sales and foreclosures because I think they look like a good deal. What is your opinion on investing in one of these properties?

  • http://www.tinafountain.com/ Tina Fountain

    Mary, thanks for the information. There is a perception among sellers and agents that a short sale has less impact on credit than a foreclosure. It’s helpful to see the info directly from the myfico site.

  • http://www.keykingstonhomes.ca Kingston Apartments

    I didn’t realize short sales & foreclosures have the same affect on your credit rating. I guess it makes sense but I would think banks prefer shorts sales oppose to foreclosures.

  • http://www.capitalmotion.com/ Mack

    Foreclosure and short sales can affect your credit rating. This may put you on a high risk for another mortgage. Please visit my website.

  • Anonymous

    Mary,

    Do you have any insight into the Loan Mod bill’s relevance to an investment property? A little over a year ago we took a loan on a piece of land that is now worth a small portion of what we paid. This circumstance coupled with the existing economy may directly impact our ability to meet future payment requirements on the investment property and our home.

    I have thought about short selling the investment property so I can eliminate those payments but am not willing to sacrafice my credit at this time.. Any insight is appreciated..

  • http://www.creditfitness.net Mary S

    Thanks for writing.
    The Bill does not specifically address loan modifications on investment properties BUT, we are beginning to have success with lenders being willing to work with us.
    The reason that you bought this piece of land would make a difference as to what we might be able to do.
    I invite you to contact me directly for a short consultation on your situation.
    858-577-2440

  • http://www.creditfitness.net Mary S

    Yes, the lender prefers a Short Sale to an all out foreclosure, but there are benefits to all out foreclosure when the lender will not work with you on how the “Short Sale” will be reported.
    Anything less than “PAID AS AGREED” will pound your credit scores down for at least two years and then will have some effect thereafter.
    Getting another mortgage in a few years will, at least now, carry the same five year wait that is required for foreclosures.
    My point is that you seek professional advice on foreclosure vs short sale in the state where your property is located and then seek advice as to what the impact will be on your credit profile as well. I can help you with that and invite you to call me for a consultation.
    Mary Supinger with General Mortgage and Owner of CreditFitness.net 858-577-2440.
    http://www.CreditFitness,net

  • http://www.realblogging.com/comment GREG

    After a short sale deal from hell, I ordered up all three credit reports and you are right, it’s a train wreck! Only thing missing is the actual Foreclosure header under your Legal/Judgement entries, as it appears if you have a Chapter 7 or tax lien. But having said that, I am now aggressively filing corrections with all 3 reporting agencies since on the entry, at least one has it listed as an actual “Foreclosure” in the comment line….even though the entry also shows “Paid” ….I have sent documentation like official mortgage note docs stamped “Paid in Full”(yes, I’ve got them), plus “Satisfaction” docs I received from both the mortgage and title companies. We’ll see what happens, but short sale sellers beware, it is correct…your report will take a huge hit and beware of how the report looks…I’m hoping I’ll at least see some chnage of language on mine after my correction filings.

    Can anyone else speak to this?

  • http://www.creditfitness.net Supinger, Mary

    I hate to be correct about this and I hate that you are now going through the difficult process of getting the credit bureaus to change their reporting.
    You also need to know that the mortgage companies who report this month after month will still continue to report what they are now reporting. Unless you change that, any change on your credit reports will be temporary.

    I really do want to hear about your progress with this. Call me at 619-701-4321 or contact me at mary@creditfitness.net or through this blog.
    Best Regards,
    Mary Supinger

  • I hate Mary

    It’s amazing that Mary keeps deleting my blogs….appearantly she can’t take negative publicity…people… (**blog administrator exercised his rare, yet effective power of deletion.

  • Mel Aclaro

    I respectfully suggest, anonymous commenter, that you please verify the truth of your statements before making claims–especially anonymous ones.

    In fact, your posts have been deleted, not by the author, but rather by the blog’s administrator.

    RealBlogging encourages a culture and principle of RESPECTFUL debate.

  • John

    Mary is partially correct. BUT I disagree with her 100% about how there is not much a of a different. Use common sense. If you do a forec. you are not cooperating with the bank or anyone. You will see your correct score drop hundreds of points. You will have liens on your property and lawyers involved (sometimes) (collectors) etc….as well as…AND YES THIS IS A FACT..you can have banks have courts file for your paychecks to be garnished. PLEASE CALL a lawyer about this or muliple lawyers before you take advice on this site/blog. She has points…but bottom line…a short sale IS better than a forec.

  • Mary Supinger

    Hi John:

    Thanks for writing. The subject of the post is how the short sale or foreclosure will affect your credit scores.

    Of course there are differences as to perception, legal ramifications, etc.

    Again, I cite my authority on this topic:

    Short Sales, Deed in Lieu of Foreclosure, or full blown Foreclosure are all weighted the same in determining credit score computations. This information comes directly from MyFICO.com. MyFICO.com is operated by the Fair Issac Corporation, the inventors of credit scoring. I have not stated this without extensive research. This is “straight from the horse’s mouth.

    The other points that you address are not the subject of this post, though you make very fine points.
    Thanks for writing.

  • http://www.bankloans.com Shawn Yurkanin

    Mary,

    I was looking at MyFico.com with the link you provided but can’t seem to find the article you reference. Would you mind posting the permalink to the article?

    Thanks.

  • http://www.SouthernCaliforniaMortgageBlog.com Mary Supinger

    In my original post, it is embedded in the MyFICO.com in this sentence. “This information comes directly from MyFICO.com.”

    Thanks,
    Mary Supinger

  • http://www.SouthernCaliforniaMortgageBlog.com Mary Supinger

    Hi again!

    I am having trouble with putting the link directly into this posting.
    Go to the original posting at the top of all of this and in the sentence that reads “This information comes directly from MyFICO.com.” the link to the article that supports the fact can be found by clicking on the words MyFICO.com.
    I hope this helps!

    Mary Supinger

  • http://www.bankloans.com Shawn Yurkanin

    Yes-Thanks.

    I have to believe because of the enormity of the problem it will be considered almost a “sign of our times” and people who have experienced this hardship might not be judged as harshly as they have been in the past.

    Time will tell.

    Thanks again.

  • Ketan

    I admit, I have not been on this webpage in a long time… however it was another joy to see It is such an important topic and ignored by so many, even
    professionals. I thank you to help making people more aware of possible issues.
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  • http://www.stopforeclosureblog.net Dean Williams

    If you are worried about your lender getting a deficiency judgment, then the best thing to do is contact an attorney to discuss asset protection strategy with the help of Land Trusts, Personal Property Trusts, etc. This will at least help you make it tough for your creditor to relieve you of your property, making them think twice about filing for a deficiency judgment.

    The good news is that the bank cannot touch your IRA, 401(k), 403(b) and other retirement funds. On the other hand, if you used these to buy another property or asset, the bank can claim these funds. The reason for this is although creditors cannot claim retirement accounts, they can claim investment assets without special designation.

    Thus, the best thing to do is talk to your lender about a short sale rather than going in for a foreclosure. If he agrees, you can prevent a deficiency judgment.
    Another advantage with a short sale is that it can improve your credit, as it will feature as a ’settled debt’. Of course, it all depends on what your lender agrees to, so talk to him about it to establish how it will figure on your credit report and preferably get it in writing.

  • Mark

    Has anyone done a short sale in California? Let me know what the lenders are looking for.

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  • Pingback: Real estate blog| A real estate agent blogs | Real Blogging| » Blog Archive » Is a Short Sale Better Than Foreclosure?

  • Steve Tutt

    Mark said: Has anyone done a short sale in California? Let me know what the lenders are looking for.

    Yes, I specialize in California short sales, and I’m sorry there is no “one size fits all” answer Mark. It is a negotiation. Different lenders have different attitudes and practices. Each case is a new adventure. Most lenders do require that a real estate agent reperesent you in the sale. I am unaware of any FSBO short sales or lenders that would entertain one. As a real estate agent I practice in the San Francisco Bay area. I would be glad to provide you with additional information if you like. Please contact me at SteveTutt@kw.com.

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  • San Diego Homes Sale

    Even with new FHA guidelines, short sales are still preferable to foreclosure.

  • http://www.thaihomebuy.com ขายที่ดิน

    You wrote very interesting post i love your blog it contains very informative article i will share it with my friends.

  • http://www.loanrequirements.net/category/more-home-loan-sites/ Fha Investor Loans

    Help with a investor/lender problem with comps?
    Im doing a FHA loan. I found a foreclosed home I love. Its a historic schoolhouse that's been totally rehabbed inside into a nice home. Passed inspection. Loan went to underwriting and it went through. When the lender/investor received the appraisal w/pics they denied the loan on just this home. Home appraised for 30 thousand more than loan amount. Lender/investor says the problem is the comps and that they don't match because it has not been rehabbed outside (except for adding a attached garage) therefore it still looks like a school outside and because of that they cant accept the appraised amount as being completely accurate. Appraiser made comps on 2 story brick homes with same sq ft and bds/bths etc. in that area. Its impossible to find exact matching comps, there never has and likely wont be any schoolhouses for sale in our area.

    The house just needs shutters and a porch and will look exactly like a federal style home. I love this house. What can I do to get it to go through? Or any other ideas? Thanks

  • http://www.charlottesvillevahomesearch.com/ sherry

    Great info for so many facing this.Thanks for sharing

  • Insider Info

    Wow. I can't believe you are stating this as fact. It is irresponsible for real estate agents to absolutely say that there is no credit difference, but you are going off of a statement from FI which is of an extremely general nature and proposing that as 100% absolute fact. Tsk, tsk! I can tell you that you are wrong!

    You are profiteering by slanting the conversation you your own benefit. Lenders are almost 99.99999% of the time NOT going to reduce principal. There is NO point in a Loan Mod if they do not reduce the principal to market, or even below market values!!

    Fannie may give you a loan after only 2 years. A foreclosure will not give you this opportunity.

    Again, your post stands on FI's vague, all encompassing statement. There is zero chance that it is correct. Zero.

  • http://www.facebook.com/people/Herry-Jhonsoen/100002832234330 Herry Jhonsoen

    The reason for this is the creditors can not claim retirement accounts, which may require investment goods, with no special designation.

  • http://www.homerealestatesource.com Roland Winter

    Great Post! I wished I had come across this several months ago. This would have helped a family member. Thanks for the great work!

  • Johnlaposky

    i need info on a short sale what is the up side of this sale to the buyer