Which is Better – Short Sale or Foreclosure

First let us clarify the difference between a short sale and a foreclosure.

A short sale is the process where the lender agrees to let a homeowner sell their home for less than what is owed on the mortgage. A foreclosure is where the lender takes possession of the home from the homeowner and then ultimately sells the home themselves. In many cases it is far cheaper for the lender to accept a short sale request from the homeowner than to proceed with a foreclosure.

Now, let’s get back to the question:

Which is Better For My Credit – Short Sale or Foreclosure?

In the grand scheme of things a short sale is better than a foreclosure for several reasons. In terms of your credit, a short sale will most likely hurt your credit scores and credit report as much as a foreclosure. Broadly speaking, credit scores are determined by negative items, credit balances, credit limits, number of accounts open, age of accounts open, and open public records. Specific to negative items, credit scores will decrease because of three factors:

  • How recent was the negative item
  • How late was the payment or negative item
  • How many times has the negative item been reported delinquent

In looking at these three items for both a short sale and a foreclosure, both will likely be recent, both will probably be at least three months late (if you fall behind on your mortgage payment during the short sale process), and the payments will be missed frequently for both the short sale and the foreclosure. With this being the case, it is easy to see that the credit scores will be equally impacted by either a short sale or a foreclosure.

But Is That All There Is To Consider? No…

What About Buying A Home Again?

If you are considering a short sale versus a foreclosure, the question you need to ask yourself is “how fast do you want to own a home again?” We’ll look at three possible answers you may have to this question:

  • Immediately – If you want to own a home again soon after going through a short sale process, then the only way to do that is for you to keep your mortgage payment current during the whole time you are waiting for your short sale request to get approved. Fannie Mae does approve mortgages for homeowners who go through with a short sale if they have not missed one single mortgage payment.
  • Sooner than later – if you want to be a homeowner again sooner than later, then the short sale may be the route for you. In general, you can apply and be eligible for a home loan again after just two years from a short sale, whereas a foreclosure will keep you out of the mortgage market for a minimum of 3 -5 years.
  • Not interested at all, or in the next five years – if it is not a big part of your future to be a homeowner again, then the foreclosure may be your choice.

Always keep this in mind if you are going through the short sale process. A short sale does not have to mean that your credit scores will tank. One thing you should try to negotiate with your lender is that they do not file negative remarks on your credit report as a result of your short sale. They do have the option of not reporting negative items on your credit report so make sure you ask for it with your short sale request.