Home > Foreclosure alternatives > How a Short Sale Can Affect Your Credit

How a Short Sale Can Affect Your Credit


A short sale may lessen the impact on your credit score as opposed to a foreclosure.



Conventional wisdom says that a short sale has a lesser effect on your credit score than a foreclosure, but what are the facts?

In meeting with homeowners who are considering a short sale, I advise them that their credit will suffer after a short sale. How much their credit score will drop depends on many factors, probably the biggest being the short sale agreement that we can negotiate with their lender.

Theoretically, even after a short sale, your lender could sue you for the difference between what they receive and what you owed. For example, say you owe $100,000 on your mortgage, and after a short sale, your lender received $80,000, in New Jersey, you could legally be on the hook for the remaining $20,000.

However, given the current economic climate and HAFA rules which often apply, lenders are not seeking these “deficiency judgments” at all. And in the unlikely event that a lender did seek a deficiency judgment, you can always continue to negotiate with them to get that taken out of the agreement.

So let’s assume the lender agrees to forgive any remaining debt, your credit score will still suffer. First of all, you are most likely behind on your mortgage payments, so your credit takes a hit right there. And if the short sale is reported as debt settled for less than the amount owed, your credit score will take another hit.

The big difference between a short sale and a foreclosure is the amount of time you will have to wait to qualify for a mortgage. With the new Fannie Mae guidelines, you can be eligible for a mortgage after a short sale in as little as two years. With a foreclosure some people may be eligible for a mortgage again in as little as two years, but more likely it will be at least four to five years before you can get a mortgage with a decent interest rate and without an overly large down payment.

Lenders are also looking differently at the cause of foreclosures. If a job loss or other uncontrollable circumstances cause the foreclosure, you will be looked at differently than people who simply walk away from homes they can afford simply because they owe more than the home is worth.

To make  a long story short, there are a number of reasons people choose a short sale over allowing a home to go through foreclosure. Aside from reduced impact on credit and future eligibility for another mortgage, a short sale allows a financially distressed home owner to restore some dignity to the process. Rather than having their home taken from them by the Bergen County Sheriff’s Department and sold at auction, they, or their agent, can negotiate a settlement with their bank, and they can move on with their lives in a much more orderly manner.


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