Short Sales Tips

As many homeowners are facing tough decisions on what to do with their homes, many are being forced to consider which is worse for your credit score, a short sale or a foreclosure.

According to the folks over at the Fair Isaac Corporation, FICO, as we know them, there doesn’t seem to be much of a difference.

They are both bad:

How will your FICO score consider a foreclosure?

There’s no denying that foreclosures are considered a very negative event by your FICO score. With that said, it’s a common misconception that a foreclosure will make it impossible to rebuild your credit. In fact, if you keep all of your other credit obligations in good standing, there’s a good chance that your FICO score could begin to rebound in just 2 years. Try to pay your auto loans, credit cards and any other credit obligations on time to limit the effect of this foreclosure.

Are other options better for my credit standing?

Recently, several alternatives to foreclosure have become popular – some of these include “short sales” and “deeds-in-lieu of foreclosure”. These may be viable options for you, and you should definitely do research to determine if these options make sense for your situation. However, as far as your FICO score in concerned, there is no difference between foreclosures and short sales or deeds-in-lieu of foreclosures. Each of these actions is considered an account that was “not paid as agreed”, and will have the same impact to your FICO score.

How does a foreclosure or short-sale affect my score?

Credit bureau reports are limited in how they represent foreclosures today, so it’s generally not possible to tell from the credit report if a reported foreclosure is a short sale, deed in lieu of foreclosure, settled account, regular foreclosure, or some other variation. The FICO® score treats all of these descriptions that appear on credit reports as serious delinquencies, so they have an impact on the score similar to the impact from a charge off, tax lien or account included in bankruptcy.

How long will a foreclosure affect my FICO score?

A foreclosure remains on your credit report for 7 years, but its impact to your FICO® score will lessen over time. While a foreclosure is considered a very negative event by your FICO score, it’s a common misconception that it will ruin your score for a very long time. In fact, if you keep all of your other credit obligations in good standing, your FICO score can begin to rebound in as little as 2 years. The important thing to keep in mind is that a foreclosure is a single negative item, and if you keep this item isolated, it will be much less damaging to your FICO score than if you had a foreclosure in addition to defaulting on other credit obligations.

What about bankruptcy?

While both foreclosures and bankruptcies are considered very negative items by your FICO score, a foreclosure can be isolated to a single account (your mortgage account). Often, bankruptcies involve multiple accounts that are “not paid as agreed”, so bankruptcies have the opportunity to be farther reaching than foreclosures. However, if you’re unable to pay other credit obligations in addition to your mortgage, you may need to consider bankruptcy. Here’s a post on the FICO Forums that lists some good resources regarding bankruptcies.

What Should You Do If You Are Facing Foreclosure

Consult An Attorney:  If you are facing a financial crisis that may end in either foreclosure or bankruptcy, consult an attorney to explore what your best option may be.  The right decision may save you years of restricted credit in the future. 

Talk to Your Bank: Your lender might grant you a few months time to sell your house on your own, for instance, or banks might agree to a payment plan for your credit cards.  If your home is worth more than what you owe on your mortgage, you might give the lender your deed in lieu of foreclosure.  This means you will turn over the deed to the lender, who assumes ownership of the home. 

Know the Facts: Bankruptcy and foreclosure move forward in entirely different ways.  Check out our Resource Center and review the Tips to Prevent Foreclosure, Short Sale FAQ, Foreclosure Myths, Seller FAQ, and the IRS and Implications of Foreclosure.

Additional resources from the web:

FreddieMac Guide to Avoiding Foreclosure

After a foreclosure, bankruptcy or short sale 

Will a Short Sale Ruin Credit

What Happens With Two Mortgages on a Short Sale

Reasons to Sell on a Short Sale

Are your trying to save your home or your credit score?  If your are trying to save your home and if  you have managed to stay current on your mortgage payments but haven’t been able to keep up with other debts, bankruptcy may make more sense, as you’ll likely be allowed to keep your home. 

What’s Less of a Blow to My Credit Rating?

 I’ve read a few different things that say it’s better for your credit to go the bankruptcy route, and but according to the Fair Isaac Corporation, FICO, as we know it, that’s not case.

When you have a foreclosure:

 A foreclosure remains on your credit report for 7 years, but its impact to your FICO® score will lessen over time.  While a foreclosure is considered a very negative event by your FICO score, it’s a common misconception that it will ruin your score for a very long time.  In fact, if you keep all of your other credit obligations in good standing, your FICO score can begin to rebound in as little as 2 years.  The important thing to keep in mind is that a foreclosure is a single negative item, and if you keep this item isolated, it will be much less damaging to your FICO score than if you had a foreclosure in addition to defaulting on other credit obligations.

When you declare a bankruptcy:

A bankruptcy is considered a very negative event by your FICO® score regardless of the type. As long as the bankruptcy is listed on your credit report, it will be factored into your score. However, as time passes, the negative impact of the bankruptcy will lessen. Typically, here is how long you can expect bankruptcies to remain on your credit report (from the date filed):

• Chapter 11 and 7 bankruptcies up to 10 years.
• Completed Chapter 13 bankruptcies up to 7 years.

Keep in mind that these dates refer to the public record item associated with filing for bankruptcy. All of the individual accounts included in the bankruptcy should be removed from your credit report after 7 years.

For more information of from FICO on how bankruptcy and foreclosure will affect your FICO score, see the Credit Education Center section at their website.

What Should You Do If You Are Facing Foreclosure

Consult An Attorney:  If you are facing a financial crisis that may end in either foreclosure or bankruptcy, consult an attorney to explore what your best option may be.  The right decision may save you years of restricted credit in the future 

Talk to Your Bank: Your lender might grant you a few months’ time to sell your house on your own, for instance, or banks might agree to a payment plan for your credit cards.  If your home is worth more than what you owe on your mortgage, you might give the lender your deed in lieu of foreclosure.  This means you will turn over the deed to the lender, who assumes ownership of the home. 

Know the Facts:  Bankruptcy and foreclosure move forward in entirely different ways.  Check out our Resource Center and review the Tips to Prevent Foreclosure, Short Sale FAQ, Foreclosure Myths, Seller FAQ, and the IRS and Implications of Foreclosure.

Additional resources:

FreddieMac Guide to Avoiding Foreclosure

U.S. Department of Justice Bankruptcy Information Sheet

U.S. Courts’ Bankruptcy Basics