How Does a Short Sale or a Foreclosure Impact Your Credit Score

You are most likely weighing the pros and cons of a short sale vs. a foreclosure. If you, like many other Americans right now, are coping with a challenge to meet your mortgage payment. This may be due to one or a combination of these common struggles: 1) job loss, 2) increasing rates if you are in an ARM loan, and 3) decreasing home values. It is most likely that you are deeply concerned with how either of these ugly terms will affect your credit score and which one may be the better choice of the two burdens. Instead of being intimidated, you are at least getting educated on your choices and the consequences. Though the reality of a short sale or foreclosure is not positive, researching what you will face is a good start to finding the best solution to your individual situation.

With a short sale, lenders typically take a loss on a loan that reflects the difference between what you owe and what the property actually sells for. They must be willing to accept this level of risk, and may execute one of two actions in a short sale: A) Sue you, the homeowner, for the difference; reflecting on your credit as a deficiency judgment which could profoundly impact your credit score in a negative way, or B) if they choose not to sue, they very well could absorb the loss, show it as a tax write off, and the IRS would see this as income sent your way. You would then be taxed based on the difference of the lender’s loss. This could prove to be extremely costly; however there would be no deficiency judgment showing on your credit.

Maybe your mortgage payments are current and you could proactively foresee any issues with your ability to continue to make them. Partnered with being current, if you have available assets to pay the difference within your short sale, then there should be no need for negative dings to your credit. Since you are in control of the sale, on top of your mortgage payments, and could pay the difference out of pocket, this may not be handled as an actual foreclosure. Hence this would be the ideal situation.

Now, a foreclosure is exactly what it is. You have fallen behind in your mortgage payments; you cannot sell your home due to housing market conditions and have chosen to walk away. A completed foreclosure can stay on your credit for up to 10 years and can literally sink your credit scores. Your credit score could potentially drop anywhere from 100 to 400 points; severely impairing your credit. If you are forced into a short sale, behind on your payments, and are unable to pay the difference, this “short sale” could reflect on your credit just the same as a foreclosure would.

Either situation that confronts you, whether it is after your foreclosure or a deficiency judgment from a short sale, the key to recovering from this successfully, is the determination to improve your credit once the damage is done. With your positive actions, commitment and patience you can fix your credit, and the dream of becoming a homeowner once again could someday become a reality.