What Are The Effects Of A Foreclosure Or Short Sale On Your Credit Score?

Wednesday, August 29th, 2012

With so many consumers evaluating their options, it is important to understand the difference between a short sale and a foreclosure, and how each option may impact your credit scores. So, what is the difference between a short sale and foreclosure? A short sale occurs when the lender agrees to accept less than the total amount owed on the mortgage loan. A foreclosure is the legal termination of all rights of the borrower as the owner of the home and the lender repossesses the home. In a foreclosure, the estate becomes the absolute property of the lending institution.

The perception that a short sale will always have less impact on a credit score compared to a foreclosure is simply a credit score myth.  If a foreclosure or short sale appears on your credit report it is considered negative because it predicts future credit risk. Generally speaking, the impact on your credit score will be similar for both a foreclosure and a short sale.

The exact score impact of a foreclosure or a short sale will depend on several factors including:

.Additional information reported on the mortgage account, included in a foreclosure or short sale. For example, late payments associated with the mortgage account prior to the foreclosure or short sale and how recently those past due payments took place.

.Current credit profile of the consumer.  For example, how the consumer is managing all their other credit obligations such as credit cards, car loans, student loan, etc.  Are other bills being paid on time or have missed payments been reported on these as well? And are credit cards showing high balances?

.The negative impact on a credit score appears more severe if a foreclosure or short sale is reported on a credit report that has little or no history of missed payments and or derogatory information. In these scenarios, the number of points lost can be 150 or greater.