As a borrower, it is important to understand how a short sale or foreclosure could affect their credit score, as negative impacts on one's credit score can be costly.
A short sale occurs when the lender agrees to receive less money than the amount owed on the mortgage; this is typically done when the borrower pays the remaining balance in a lump sum and the lender agrees to accept less than the full amount. This results in the borrower's mortgage debt being completely discharged. A foreclosure, on the other hand, occurs when the lender takes back ownership of the home, often because the borrower has defaulted on their loan, and the borrower may still owe the lender money even after the foreclosure.
While both short sales and foreclosures are less than ideal situations for lenders as well as borrowers, it's important to understand that both will have an impact on a borrower's credit score. The exact impact on the borrower's credit score can vary depending on certain factors like the individual's current credit profile, how quickly the loan is paid off, and the status of the loan prior to the short sale or foreclosure.
The most severe impact on a credit score is most commonly seen in the event of a foreclosure. A foreclosure can stay on a credit report for up to seven years and can result in a decrease of more than 100 points to a borrower's credit score. It is also important to consider the long-term effects of a foreclosure, such as being unable to obtain future credit for a period of 7 years.
In the case of a short sale, the effects to credit score are usually not as severe. A short sale typically affects a credit score by 20 to 40 points. Furthermore, a short sale can remain on a credit report for up to two years. Therefore, it is important for borrowers who are considering a short sale to understand the long-term consequences that may arise from the short sale.
It is important for borrowers who are considering a short sale or foreclosure to be aware of the potential impacts on their credit score. While these impacts may not be immediate, they can become very costly if not properly managed. Borrowers should be prepared to deal with the long-term implications of a foreclosure or short sale before taking action. Additionally, borrowers should seek out professional financial advice and counseling to help them make the best decision.
Short sales and foreclosures both have serious consequences that can affect a borrower’s credit score for many years to come. It is important for borrowers to understand the potential effects that each of these scenarios can have on their credit. In the case of a foreclosure, the borrower could potentially see their credit score decrease by up to 100 points and remain on their credit report for up to 7 years. With a short sale, the effects are usually much less severe, but still could remain on a credit report for up to two years and cause a decrease of between 20 and 40 points. Ultimately, it is important for borrowers to seek out professional advice to ensure they are making the best decision for their financial situation, as the consequences of these types of situations can be expensive if not handled properly.
This article was contributed on Nov 10, 2023