Short Sale vs. Foreclosure: The Impact on Credit
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.
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We’re increasingly seeing distress, and resulting short sales, on the commercial side. Could be the next shoe to drop.
Great site!
Foreclosure and short sales can affect your credit rating. This may put you on a high risk for another mortgage. Please visit my website.
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?
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.
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
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!
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
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
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.”
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?
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.
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.
Foreclosure and short sales can affect your credit rating. This may put you on a high risk for another mortgage. Please visit my website.
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..
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
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
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?
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
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.
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.
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