Short Sale vs. Foreclosure; Your Credit

Foreclosures are worse than a short sale on your credit and for purchasing a future home. The main components on your credit report and items that affect your score are; 

1. Aging of open accounts.
2. Your payment history.
3. Balances owed in relation to available credit.
4. Your public records.

Each of these components has an impact on your credit worthiness and ability to purchase a home in the future. Short sales and Foreclosures both show the delinquent payment history however a foreclosure will also show as public record and have a negative impact for 7 years. A short sale is not listed as a public record.

In a short sale the outstanding debt, if non-purchase money debt (a refinanced mortgage or cash out loan), can be negotiated for complete forgiveness with no deficiency or recourse.

Not only will a foreclosure remain on credit for 7 years and impact your credit but with a foreclosure the sold out junior lender(s) and or lien holders(s) have the right to full recourse and to continue to pursue a deficiency judgment on the deficiency amount. A deficiency judgment will have further negative impact on your credit. Additionally lending practices for those with foreclosures on record are stricter and the seasoning periods on qualifying for a new loan are longer. 

• HUD states for FHA loans a borrower having sold a property as a short sale will be eligible after 2 years for a new loan, versus 3 years for a foreclosure. 
• Fannie Mae as of June 25, 2008 has updated guidelines, which states that a short sale will be eligible after 2 years for a new loan, versus 5 years for a foreclosure. (Fannie Mae Selling Guidelines Announcement 08-16).
• Federal Home Loan Mortgage Corporation as of October 17, 2008 has updated guidelines, which states that a short sale will be eligible after 4 years with an exception for extenuating circumstances of 2 years for a new loan, versus 5 years for a foreclosure.

A Real Estate Professional experienced with short sales can properly negotiate the short sale settlement and stop the continued reporting of negative information.