Money Talks, So Should You

Q&A: Does a short sale affect my credit the same as a foreclosure?

Alan Moore
by Alan Moore, The Garrett Network  (@@R_Alan_Moore)

With the recent difficulties in the real estate market, the number of short sales and foreclosures has increased. If you are in a position of needing to get out of a mortgage you can no longer afford, you may be wondering what effect a short sale or foreclosure will have on your credit score.

What is a short sale?

A short sale is when a home owner sells their home for less than they owe on the mortgage and the bank forgives the remainder of the loan. For instance, let’s say a homeowner owes $200,000 on their mortgage and they need to sell their home. Because of the recent market turmoil, their home is now only worth $150,000. The bank may agree to let the homeowner sell their home for $150,000 and forgive the remainder $50,000 on their loan.

What is a foreclosure?

A foreclosure is when a homeowner stops making their mortgage payments, and the bank eventually takes their home. When you take out a mortgage, you are committing to making the payments to the bank. If those payments are not made, the bank has the right to take back the home and sell it in order to recover the proceeds from the loan.

READ: Q&A: Can I buy a house if I have no credit history?

How do they affect my credit score?

Both short sales and foreclosures typically affect your credit score in the exact same way. FICO, the agency that reports credit scores, estimates that a foreclosure or short sell will lower your score by 175-300 points.

One of the difficulties is that many banks will not consider agreeing to the short sell unless the home owner is over 90 days late on their mortgage payments. Why? Because the bank wants to be certain the homeowner can’t make their payments before agreeing to take a substantial loss.

What can you do?

If you are in the unfortunate position of considering a short sell or foreclosure, talk to your lender immediately. Explain to them your situation, and let them know you are not going to be able to make your payments. It is possible that if you are able to convince the bank you are going to have to do a short sell, they may process it before you are 90 days late. Not having the 90-day-late notice on your credit report will help your score, however the short sell will still have a significant impact.


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Alan is the founder of Serenity Financial Consulting and is a Certified Financial Planner professional and Certified Retirement Counselor. He earned his bachelor’s degrees in Family Financial Planning and Consumer Economics and his Master’s Degree in Family Financial Planning from the University of Georgia.