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Which is Worse for you - a Short Sale or Foreclosure?

A Short Sale or Foreclosure?

It’s not something anyone wants to think about – not being able to pay your mortgage. Unfortunately, life is unpredictable and you may find yourself in a tough situation. If you can no longer afford your mortgage, you may be faced with the decision of either foreclosing on your home or completing a short sale. Your credit score will be negatively affected by either one of these decision, but the impact can vary depending on your credit history, and how the lender reports the event to credit agencies.

The difference between Foreclosure and Short Sale

When a foreclosure is reported to the Credit Reporting Agency (CRA), the balance makes up the entire unpaid loan amount on the date the home went in to foreclosure. A short sale balance is made up of the outstanding loan amount on the date of the short sale, minus the sale amount received from the buyer.

Generally, the higher the balance or past-due amounts reported by the CRA, the bigger hit your credit score will take.

Because a short sale should end with no past due amount reported, the initial advantage looks to be for short sale. However, initial advantages dissipate as time goes by and more recent information on your credit (timing of payments, loan requests, etc.) become available.

At the same time, it may be assumed that a foreclosure is preceded by several late mortgage payments, while a short sale may not have a single late payment leading up to it. The short sale would then be looked at as one negative event in your credit history, while late payments, followed by a foreclosure, would be viewed as several negative events.

According to FICO, homeowners who go through foreclosure tend to take longer to rebuild their credit. This may be due to the fact that foreclosures are often triggered by life events such as divorce or job loss, that are likely to cause financial stress after the foreclosure.

What’s the impact?

Again, there’s no simple answer. A general rule of thumb is the higher your credit score was to begin with, the bigger the impact a foreclosure or short-sale will have on it. There’s more than just your credit score to take in to account, as well. It can be harder to qualify for a mortgage after a short sale or foreclosure.

Working with a trusted lender can help ensure you make the best decisions for both your present situation and future plans.

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