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How Does a Short Sale or a Foreclosure Affect My Credit Score?

- Thursday, March 28, 2013

Just because you are having trouble paying your mortgage right now, doesn’t mean that you may not want to enter the housing market again a few years down the road. Smart homeowners who are looking to get rid of their current mortgage debt know that the decisions that they make now will affect their future. One of the things that they consider when assessing solutions (negotiating a short sale, filing bankruptcy, or simply awaiting foreclosure) is how their choices will affect their credit score, and their ability to get new financing.

The credit-reporting agencies (Experian, Transunion, and Equifax) are notoriously tight-lipped about how they calculate credit scores. How a short sale or a foreclosure will affect your credit score depends upon a number of things, including what your credit score was before the short sale or foreclosure (higher scores tend to fall further), and, especially, whether you were delinquent on mortgage payments before the short sale.

Since the credit-reporting agencies do not release their formulas, most of the information available is more “anecdotal” - from blogs and discussion forums. Much of the older information (as in two or more years old) indicated that the hit to a credit score from a short sale was about the same as the hit from a foreclosure on record. However, things have changed lately!

Much of the actual credit score hit was due to the mortgage payment delinquency. Mortgage delinquency is what leads to a lender initiating a foreclosure, so the two go together. It used to be that a borrower had to be delinquent on mortgage payments before most lenders would even look at a short sale request. However, these days, most lenders will consider a short sale request by a borrower who has not yet missed any mortgage payments. In particular, if that borrower can demonstrate to the lender that they are “at imminent risk of default” - i.e. that changed circumstances (e.g. unemployment, increased medical expenses) mean that the borrower will default soon if nothing is done.

This means that, these days, it is possible to do a short sale without ever becoming delinquent, or, in the case of some short sale programs, being only one month delinquent.

For a borrower who has remained current on mortgage payments, the “hit” of a short sale on their record can be as little as 60 points, or even less, and it may remain on record for as little as 12 to 18 months. For borrowers who were behind on mortgage payments when they did the short sale, the hit may be more like 100 points or more. In contrast, a foreclosure may cost the borrower between 250 and 300 points. A foreclosure remains on the borrower’s record for seven years.

Seattle Short Sales has a team of experienced and successful real estate specialists dedicated to working with distressed homeowners. We close, on average, 12% of all short sales per month in King County. In the last 24 months, we have negotiated over 756 short sale approvals, and discounted over $81 million of mortgage debt for distressed homeowners.

In addition to our short sales negotiators, our team includes dedicated professionals advising and advocating for homeowners in the fields of: loan modifications, bankruptcy, debt settlement and collection defense. As part of our service, we offer unlimited attorney and CPA consultations.

If you are a homeowner who is struggling to make ends meet, and would like to learn more about the options available to you, please go to:

You can also contact Lambros Politis on Google+ or to find more up to date information on this subject, go to the Ark Law Group Blog. 

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