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Foreclosure and Short Sale Credit Consequences
No homeowner wants to think about losing their home to foreclosure or undergoing a short sale, but in reality, it does happen. Some lenders would rather accept a short sale, in order to avoid the foreclosure process. A homeowner may rather short sale their home as well, in order to pay off the loan for less than what is owed. In either instance there are repercussions on the homeowner’s credit.
How Short Sales Affect Your Credit
First of all, a short sale occurs when the proceeds from the sale of a house are less than what the owner still owes on the mortgage. When sellers have a home go through short sale, they typically lose 50-100 points on their credit rating. The sellers may wonder about their future home buying power after a short sale as well. Even after losing some of their credit rating, the sellers can typically buy another home in about two years at a good interest rate. Only the late mortgage payments get reported when a homeowner undergoes a short sale.
How Foreclosure Affects Your Credit
In a foreclosure situation, the homeowners lose much more of their credit score than they would in a short sale. The sellers credit score after foreclosure will usually fall 300 points. It will also affect the length of time before a buyer can get a good interest rate when buying another home. After foreclosure it typically takes up to ten years for a borrower to get a good interest rate. Foreclosures must always be listed on any credit application as well. If a homeowner has more than one property that forecloses then their credit could be damaged up to 600 points.
Ways Short Sales and Foreclosures Affect Your Life and Employment
|
Issue |
Foreclosure |
Short Sale |
| If you have a job requiring security clearance | A foreclosure will usually cause loss of security clearance and many times the position | Usually does not challenge security clearance |
| Current Employment Repercussions | Employers can check current credit records of employees in sensitive positions and foreclosure may cause termination | Not reported on credit, so usually causes no changes in employment. |
| Future Employment Repercussions | Foreclosure must be listed on applications and many times will cause failure to get the applied for position | Not on a credit report, so usually does not affect |
| Deficiency Judgment | Bank has the right to file for Deficiency Judgment (unless in states with Deficiency Judgment laws) | Lender may be convinced to forgo seeking Deficiency Judgment |
| Amount of Deficiency Judgment | If the foreclosure does not sell at auction, it will sell at an even lower cost and result in a higher deficiency judgment being filed. | Usually home is sold closer to market value, so there is a lower deficiency judgment (if one is filed). |
Foreclosure vs. Short Sale Future Loan Issues
|
Issue |
Foreclosure |
Short Sale |
| Primary Residence Fannie Mae Loan | Ineligible for 5 years | Eligible after 2 years |
| Non-primary Residence Fannie Mae Loan | Ineligible for investment loan for 7 years | Eligible after 2 years |
| Loan with any other company | Future rates will be affected after answering “yes” on 1003 asking if you have been in a foreclosure | Question about short sale is not asked on a form |
| Credit Score | Lowers by 250-300 points, which lasts at least 3 years | Only the late payments are reported. Lowers score 50-100 points and affects may only last 12-18 months. |
| Credit History | Stays on public record for 10 years or more | Nothing shows up except that mortgage was taken care of. |
What To Do with Your Greater Atlanta Real Estate Investment?
If you have gotten into a situation where a short sale or foreclosure is the only option, you need to speak with a lending professional or short sale/foreclosure expert to determine what steps you need to take. They are able to guide you through the process and conclude what is the best course of action. The best thing to do is contact a knowledgeable professional, like The Safford Group to discuss all your options. Please contact them today to start deciding what your choices are before its too late.
We at The Safford Group, REALTORS do our best to provide you with current and accurate information. However, we are not attorneys or accountants. Please consult with your attorney or CPA for further information and how this information may affect you personally.
