Having a short sale will definitely affect your credit in a negative way, although, its effect is not as severe as that of foreclosure or deed-in-lieu.
First of all, let us define the concept of short sale. It is an option for homeowners when the amount of mortgage balance owed to the lending firm is greater than the actual market value of the property. Short sale is an option for people who are in the verge of foreclosure due to financial difficulties yet would like to escape the foreclosure process and its impact on their credit report. This is currently the practice in the United States of America where the sub prime adjustable rate mortgage mess continues to cause foreclosures to a lot of homeowners.
In a much simpler explanation, short term happens when the lender agrees to accept the house at less than the amount a homeowner owes the lending company. This happens typically because the homeowner does not posses enough equity to pay the cost of the property even if he or she would sell the house. Remember that the lender should agree to this arrangement, if not, then it means you are still headed to foreclosure.
Even though both short sale and foreclosure cause damages to the credit report, short sale will still have less damage and therefore the lesser of two evils, if you have to choose one. Also, with a foreclosure or even deed-in-lieu of foreclosure, it will take much longer time to restore your credit into good standing unlike when you decide to opt for a short sale.
A foreclosure or a deed-in-lieu of foreclosure will incur, more or less, the same negative effect on your credit report and credit score. Your FICO score can go down to as much as 200 up to 280 points because of these. If for example your credit score today is 675, it could drop to as low as 395 due to foreclosure or a deed-in-lieu. In effect, this will not qualify you for any credit approval in the future. The least time you could expect to restore your credit score is three years.
Meanwhile, when it comes to short sale, less damage is to be expected. The FICO points you can lose from a short sale transaction is between 75 to 125 points. Also, your credit report will show “pre-foreclosure in redemption”, which is less negative when viewed by lending firms. Instead of three years of recovery, you can apply for a home loan and have a better chance of being approved in just a span of a year and a half.
Before deciding on having a short sale, you should always consult first your lawyer, your certified public accountant or tax accountant or even a qualified real estate agent experienced in handling short sales. The said professionals will charge a hefty price for their service but not taking advice from the experts could lose you more money in the process. Do not go into short sale alone especially if you are not skilled enough.
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