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What Better for Credit Score Foreclosure or Short Sale?

In today’s economy, there are a lot of people facing either a foreclosure of their home, or a short sale to get out from under the debt of their mortgage. Both of these seem like viable options when faced with a horrible situation, but, both of them also have long-term consequences when it comes to how much they can damage your credit. If you are trying to decide which the better route to take is, breaking each down into how much damage it can potentially do is often the best approach.

The Consequences of a Foreclosure

When it comes to foreclosure, you should expect to see a large hit to both your credit rating and your interest rates. This comes as your other creditors report to your credit report and see for themselves what is going on. Your interest rates on other forms of credit can skyrocket upwards, while your credit rating will take a hit downward. This will stay on your credit for approximately seven years, and make it more difficult for you to seek out homeownership again in the future. The foreclosure itself will likely take your credit score down 100-150 points, but that does not include any of the late payments that have likely been a precursor to the actual foreclosure, which can cost you several hundred points even before the foreclosure hits.

The exception to this is if the only ding to your credit report is the foreclosure itself, as at that point, you can likely explain the situation and have your credit restored to its pre-foreclosure levels within 2-3 years. The problem is that most people only get to the point of a foreclosure after they have been hit with some type of financial fallout that has affected all of their finances. If this is the case for you, then you should take the time to save up as much money as you can during the foreclosure process so that you can find a home or apartment to rent once the process is over to start correcting your financial situation.

The Consequences of a Short Sale

A short sale, on the other hand, has a little more wiggle room. Some lenders are more accepting of a situation where the owner can prove a hardship and are willing to settle the debt of the house itself for less than what the property is worth. This can sometimes even show up on a credit report as ‘paid’ which is ultimately what the homeowner wants. However, you should expect anywhere from 85 points up to 200 points of a reduction in your credit score from a short sale, similar to that of a foreclosure. This could be easier to fix if the hit is smaller and the lender agrees to mark the debt ‘paid’, or it could be harder if the hit is larger and the lender only marks ‘settled’ on your credit report.

Checking to Make Sure Your Credit Stays Accurate

The best way to know just how much damage either of these has done to your credit report is to pull your own credit report and look. You should make sure everything on it is accurate on a regular basis anyway, so this just gives you more reason. The damage from a foreclosure or a short sale will be visible, but you also want to make sure that the debts have been properly noted and removed from being current. If you find any discrepancies, then you want to make sure you contact both the lender and the credit bureau to ensure these are all fixed.

Whatever decision you make is ultimately up to you and your specific circumstances. However, the long-term effects are something to make sure you consider. They can affect the rest of your life in some cases, and they can make life difficult for quite some time no matter which route you take. Think about your decision carefully, and if you are in doubt, contact your mortgage company or some local realtors and get some information on options you may not have even considered. This may help make the decision easier.