Short Sale Versus Foreclosure: Which is Better for Your Credit Score?

Both short sales and foreclosures will have a negative effect on your credit score; however, one of these options will impact a homeownerÂ’s credit score significantly less.

Many homeowners have questions about short sales and foreclosures. Homeowners who struggle to pay their mortgages often wonder what the best option is for their family and their home. There can be tax and credit consequences for both short sales and foreclosures. Both remedies require that homeowners give up their property to either another homeowner or a bank. However, one of these options will impact a homeowner’s credit score significantly less.

Foreclosure and Short Sale: What’s the difference?

When a property is foreclosed, the bank has assumed ownership of the property due to the homeowner’s failure (or inability) to pay back a home loan. Foreclosure is a lengthy, strenuous process which involves foreclosure notices, appraisers examining the property, and bank representatives calling the homeowner to demand money. In addition, a foreclosure can negatively affect a borrower’s credit score for seven years or more, making it difficult or impossible to buy property in the future.

A short sale stops an over-mortgaged property from entering into foreclosure. When a homeowner has successfully complete a short sale, this homeowner has sold his property (with the bank’s approval) for less money than he owes on his home loan. The term “short sale” comes from the fact that the bank is allowing the home loan to be satisfied even though it is “short” of the original monetary agreement. A short sale allows the bank to recover most of their losses without having to assume ownership of the property, fix it up, and market it for sale again.

Short Sale or Foreclosure: Which is the Best Option for Your Credit Score?

Simply put, a foreclosure is bad for your credit, but a short sale is not as bad.

A a history of foreclosure will negatively affect a borrower’s credit score for seven years or more. This can be a serious problem for people who have recently lost their job and their home. A recorded foreclosure will show future lenders that the borrower is at a high risk of not paying back debts. It can be extremely difficult to get a loan for a car or a new home for many, many years.

However, a recorded short sale has a significantly smaller effect on a borrower’s credit score. A short sale will negatively affect a borrower’s credit score for as little as two to three years. This advantage allows borrower’s to recover from their financial hardships much quicker, allowing them to get into a new house in only a few years.

For homeowners with over-mortgaged properties, a short sale could be the answer. Because of the higher credit consequences associated with foreclosure, short sales can be more beneficial to homeowners in the long run.


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