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Chris Pendleton


Shannan Marty

Associate Broker - Realtor®, ABR®,CDPE, CSP, CNE, CSSN, SFR, a-REO, PSC

Does a short sale affect your credit? or Which is better on your credit a short sale or a foreclosure?

Hi Chris Pendleton here, Associate Broker with Tierra Antigua Realty in the metropolitan Tucson Arizona.  We specialize in Short Sales and serve the communities of Tucson, Oro Valley, Marana, Green Valley, Sahuarita and Vail Arizona. 

One of the most frequently asked questions I get is "does a short sale affect your credit?" or "which is better on your credit a short sale or a foreclosure?"  Today I am going to talk about the long term credit ramifications of foreclosure versus credit damage of a short sale that a lot of consumers don't think about or are not aware of.

The answer to this is a bit complicated and there is a wide varying opinion.  However, based upon our experience of completing lots and lots of short sales and the feedback we have had from our previous clients the answer really doesn't need varying opinions.

First of all if you are not paying your mortgage payments your credit is going to suffer each month as each missed payment is posted.  Each person's credit is different and how fast you recover is going to be reflected on other credit you maintain and how timely you make those payments.

So initially, there is no difference in credit damage for a short sale versus a foreclosure.  The real difference in credit damage from a short sale to a foreclosure is in long term ramifications.

This is also contingent upon how the bank reports the foreclosure or the short sale to the credit bureaus.  Negative information reported to credit bureaus can stay on your report up to 7 years.  There are some exceptions to this such as bankruptcy that can be reported such as 10 years.

A foreclosure can be reported and can be seen as a current issue for up to 7 years.  Which means that on year 6 the foreclosure can been seen as a current issue having negative ramifications for the borrower.   A short sale is typically reported as a paid in full, but for less than what is owed.  This means it is not seen as a current issue and starts to heal the day after the transaction closes.  This means as each day, month or year goes by the short sale means less and less to your other or potential creditors.

It has been said by Fannie Mae that they will consider someone for a mortgage to buy another home in about 2 to 3 years after a short sale, versus 5 to 7 years with a foreclosure.

Now, one of the biggest advantage to a short sale versus foreclosure is that a lot of people don't know is that on the universal mortgage application, the mortgage application that all lenders use, is a box that says 'Have you ever been foreclosed on or done a deed-in-lieu?"   This is like ever in your lifetime.  So 50 years later you go to buy a house you will have to check that box and you will come under greater scrutiny and have to document why you were foreclosed on or did a deed-in-lieu.  So 50 years later you will have to re-live this time in your life and may have to pay higher interest rates because you are seen as a higher risk.  Now, there is no box on the universal mortgage application that says 'have you ever done a short sale?'  So once the short sale falls off your credit report you never have to disclose or talk about it again.

Homeowners that are facing foreclosure do have options.  Credit is only one of the issues that needs to be considered.  Give us a call today to schedule a free consultation to answer more of your questions.