Short Sales vs. Foreclosure.
What Are The Effects On Your Credit?
Homeowners looking to stop foreclosure are faced with a number of options, one of which is doing a short sale. Some people, depending on their situation, may allow a property to go into foreclosure instead of attempting a short sale. One reason is they don't want to keep the home in the first place. By accepting a short sale, the lender can avoid a lengthy and costly foreclosure, and the owner is able to pay off the loan for less than what he owes. The primary consideration above all is the affect both can have on your credit score.
The Basics Of A Short Sale
The concept of a short sale is fairly simple. A short sale occurs when the sale proceeds of a house fall short of what the owner still owes on the mortgage. Many lenders will agree to accept the proceeds of a short sale and forgive the rest of what is owed on the mortgage when the owner cannot make the mortgage payments. A few words of warning are in order. Not every lender will negotiate a short sale. Another consideration is you may be held liable for taxes on the difference between the sale amount and the original loan amount. Short sales require nerves of steel.
The Credit Affects
Foreclosure
Without a doubt, sellers will incur more damage on their credit report by going through foreclosure. Typically your credit score will take plunge between 200 to 300 points and the foreclosure will remain on your credit for up to 10 years.
Short Sale
Short sales have a far less damaging affect on a seller's credit report. Credit scores typically lose between 80 to 100 points (depending on the number of late payments reported by your lender). What happens to your credit down the road? It is takes, at least three years after a foreclosure before a lender will offer a sensible interest rate, whereas for a person who went through a short sale typically waits around 12-18 months to buy another home at a good interest rate.
Salvaging your credit should always be the primary concern when making the decision between a short sale and stopping foreclosure. The savings in interest payments alone should be convincing enough for most people, not to mention your buying power in the near and distant future.
Deed-in-Lieu of Foreclosure
In essence, a deed-in-lieu of foreclosure is a "voluntary foreclosure". This will appear on your credit report.