SubscribeWill a short sale hurt my credit score?
January 15, 2009
When I meet with homeowners who are struggling with their mortgage are maybe behind on payments and have no equity in their home, we always discuss their options when it comes to avoiding foreclosure. We usually get through my report and if it appears that their only option is to sell their house in a short sale, I always get this question – “Will a short sale hurt my credit score? And if so, by how much?”
I have been doing a lot of research on this topic recently, and what I have found is there is a lot of mis-information out there. It’s tough to find any definitive information about the impact of a short sale or foreclosure on one’s credit report.
I recently came across some great information provided by a mortgage broker and former underwriter in Southern California, Catherine Coy, on the www.BiggerPockets.com forums, where she explains that in terms of the Fair Issac scoring model, there is no difference between a foreclosure, a short sale, and a 120 day late (Notice of Default). Here is an excerpt from her post:
It’s a total myth that somehow a short sale is less damaging to one’s credit. Why? Because the following events are all the same; that is, the definition of a ” foreclosure” by Fannie Mae and Freddie Mac is:
Foreclosure
None in past 5 years with minimum 3 active trade lines more than 24 months old, with no late payments or derogatory credit after the foreclosure.
Definition of Foreclosure: Any 120 day mortgage late within the last 24 months, any notice of default or settlement on a real estate secured trade line (short sale), any deed-in-lieu or forbearance agreements.
The above is straight out of the Fannie Mae Selling Guide, so it’s not speculation or conjecture. All underwriters know the facts: foreclosure/short sale = same/same.
The hit to one’s FICO score is EXACTLY the same because each of the above events results in Score Factor Code #22–” serious delinquency, derogatory public record or collection.”
Now if you’re thinking, well, why would I do a short sale then? There are still other very compelling reasons to complete a short sale as opposed to letting your home go to foreclosure. The biggest reason is that you will be able to get another mortgage and buy a home again in two years after a short sale, whereas you will have to wait 5 years after a foreclosure. There is also the social stigma of having gone through foreclosure as opposed to being in control of the process and selling your home. There’s something to be said for saving your dignity.
If you want to read more of Catherine’s analysis, you can follow the discussion thread here:
http://www.biggerpockets.com/topics/17598-do-short-sales-hurt-your-credit-score-?page=1
Comments
3 Responses to “Will a short sale hurt my credit score?”
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Hum. I will have to look into this. Not sure I agree (that short sales do the same to your credit as a foreclosure). Will get back to you.
Recently I was told by a mortgage lender that a short sale will “ding” your credit to the tune of about 100 points, whereas a foreclosure would ruin your credit. This is a pretty strong statement that’s in direct opposition to your premise. I would love to know what the truth is!
I am just quoting what this woman posted on BiggerPockets.com. I have yet to see hard evidence of either way.
http://www.biggerpockets.com/topics/17598-do-short-sales-hurt-your-credit-score-?page=1