Short Sale vs Foreclosure and the Impact on Credit Scores

Short Sale vs Foreclosure
Real Estate Trends – compiled by Aazim Sharp of Steeplegate Homes.

I have gotten the impression from many real estate agents in our field that they are unaware of the effect of a Short Sale on their clients' credit report. The common belief is that a Short Sale isn't as bad as Foreclosure or Deed in Lieu of Foreclosure.

I have debated with people about this and there is a lot of information out there with claims to the contrary. It scares me because I see a lot of lawsuits in the future regarding this.
Short Sales, Deed in Lieu of Foreclosure, or full blown Foreclosure are all weighted the same in determining credit score computations. This information comes directly from MyFICO.com. MyFICO.com is operated by the Fair Issac Corporation, the inventors of credit scoring. I have not stated this without extensive research. This is "straight from the horse's mouth."

Earlier this year, the Federal National Mortgage Association (AKA Fannie Mae) announced that a record of foreclosure on a credit report will require that three years must pass prior to placing a borrower into a FNMA insured loan. At the beginning of June 2008, that time frame was extended to five years. That is five years from the sale date.

Remember, that the home owner does have redemption periods after default and because of this, the sale date is the actual date of the foreclosure. An owner wouldn't necessarily know this without researching the actual date.

The Mortgage Bankers Association announced that one in every 200 homes with mortgages is facing foreclosure. That is a lot of bad news to many families. This information was announced in June of 2008 and the news has become much worse as I write this in the begining of 2009.
The "Bail Out" bill now being reviewed again by the House of Representatives will give some "bite" to those of us who renegotiate for loan modification. Loan mods are put together for a home owner cannot keep up with the current terms of the mortgage. Changes can be negotiated and will keep you in your home.

Some 18 months ago, a business colleague I lunch with correctly predicted that short-refis would exist. They do now.....it is called Loan Modification or a "Loan Mod". A new FHA loan to reduce the balance on home loans and make the payments easier was announced yesterday. This new bill being passed will bring some order to the process and make it easier to accomplish.

If I had my home on the market because of a bad loan, but felt I needed to sell when I really wanted to stay, this would be wonderful news. If I found out that my agent said a short sale wouldn't hurt me as badly as foreclosure then I would have been gunning for someone to pay. I would rather it wouldn't be you.

Aazim Sharp is a real estate professional who resides in New Jersey and is the proprietor of Steeplegate Homes.