short sales and foreclosures are both possible outcomes for homeowners facing financial difficulties. There are many questions that can arise from this situation: what is a short sale? How is it different than foreclosure? Is one more beneficial than the other? Before making a decision on whether to sell your home via a short sale or merely allow your house to be repossessed by the Lender, it’s important to assess the pros and cons of short sale vs. foreclosure.
Your Credit After a Short Sale vs a Foreclosure
While both options affect your credit, a foreclosure can lower your FICO score much more than a short sale. In general, as with any repossession, a foreclosure can drop your score between 200 and 400 points. Because items on your credit report remain there for several years, this drop can affect everything in your life, from other credit applications to finding a job.
A short sale varies in how it affects your credit score; if the sale is done prior to your being behind on payments, it may only show up as a settlement on your credit report, which will have only a minor effect on your score. However, if you are behind on your payments, that will be reflected as well as the settlement to your Lender, and can lower your score more.
In either case, the record will remain on your credit report for up to 7 years.
Future Loan Applications
Purchasing another home in the future is always a consideration. If you sell your home via a short sale, the only thing you need to report on future loan applications is that you sold your previous home.
One of the questions on a loan application is whether you have experienced a foreclosure in the past 7 years. If you have, your loan will usually be denied. Therefore, if you default on your mortgage and lose your home to foreclosure, you will have to wait a minimum of 7 years before you purchase another home.
For many reasons, short sales are a better solution for homeowners who are experiencing financial difficulties. Although many simply give up, allowing their lien holders to foreclose on their properties. There are several reasons why one is better than the other; however, everyone’s situation is different. Homeowners should weigh the advantages of each before making such an important decision.