Short Sale Versus Foreclosure: Which Is Better?
Are There Benefits Of Short Sale Versus Foreclosure?
Many homeowners who are financially burdened with their current housing mortgage payments and are contemplating short sale or foreclosure need to understand the differences between the two and how choosing a short sale or foreclosure can affect them in the future when it comes time to purchasing another home.
Benefits of Short Sale Versus Foreclosure
There are many benefits with short sales. On short sales, you will know who the buyer of your home will be. You will be handling the sale as you being the seller and not the bank. You will not be branded that you have a foreclosure on your record. You can still do a short sale even if your mortgage payments are current and have had a timely payment record.
Waiting Period After Short Sale Versus Foreclosure
If you have had a short sale on your record, you can qualify to get a conventional mortgage loan after two years from the date of the short sale with a 20% down payment so you have an 80% loan to value. The waiting list for an FHA mortgage loan after you have had a short sale is a 3 year waiting period.
Downfalls Of Foreclosures
Purchasing a home after a foreclosure has tougher restrictions than those of a short sale. The normal waiting period to qualify for a conventional mortgage loan for a primary residence is 7 years. Some may qualify in 4 years but certain guidelines comes into play and the conventional mortgage loan borrower would need phenomenal credit. For second and investment home conventional mortgage loan financing, the waiting period is 7 years.
Will Credit Scores Suffer After Short Sale Versus Foreclosure?
Your credit scores will suffer with a short sale or foreclosure. A mortgage lender decides how they will report your short sale to the credit reporting agencies. Your short sale mortgage lender can report your short sale as paid as agreed or as a paid settlement.
Credit Reporting: Agreed Or Paid Settlements
In most cases, it will be reported as a paid settlement. If the mortgage lender reports it as paid settlement, you can probably bet your credit scores will drop by at least 80 to 100 points, if not more. This derogatory credit report of paid settlement will be on your credit record for at least 7 years from the date of the first payment you were delinquent on.
Foreclosures are often reported as a repossession or foreclosure. Both foreclosures and repossessions will be reported on your credit report for at least 7 years from the date of your first delinquency date that eventually led to the final foreclosure. You can probably bet that a foreclosure will smash your credit scores by more than 100 to 150 points if not more.
In the event if the foreclosure is followed by a deficiency judgments, you can add another 120 point credit score drop to your bruised credit score.
On most short sale cases, the deficiency is often times waived by the mortgage lender.
- In the event if the short seller encounters a deficiency judgment, it can often be negotiated between the short seller and the short sale mortgage lender.
- A deficiency judgment can be issued against the homeowner after a home foreclosure.
Both Short Sale Versus Foreclosure Will Negatively Impact Credit
However, a short sale is a much wiser choice than a foreclosure. Don’t worry about your negative credit impact whether you have a short sale or foreclosure. The sudden drop in your credit scores is just temporary after a short sale or foreclosure. Your credit scores will naturally go up as time passes even if you do not do anything to it. If your credit scores dropped from 700 FICO to a 450 FICO after a short sale or foreclosure, your credit will go up to close to 600 in about a year. If you start reestablishing your credit by getting a few secured credit cards after a short sale or foreclosure, you can bank your credit scores will surpass the 650 FICO score after a year.