Short Sales & Credit Scores

The main difference between a short sale and a foreclosure is that a short sale occurs when the lender agrees to accept less than the total amount owed on the mortgage loan. In contrast, a foreclosure is the legal termination of all rights of the borrower as the owner of the home and the lender takes possession the home. This means the home ultimately becomes the property of the lending institution in a foreclosure. Neither a foreclosure nor a short sale is a particularly great thing to have on your credit report. Both are considered negative actions by credit scoring companies because they are indications of likely future credit risks as afar as lenders are concerned. In general, both a foreclosure and a short sale can have a similar negative impact on your credit score depending on the specific details of the actions.

Factors can include any additional or extra information that might be reported on the mortgage account and included in a foreclosure or short sale, such as late payments associated with a mortgage account prior to the foreclosure or short sale and how recently those past due payments took place in relation to the action. The borrower’s overall credit profile is also taken into consideration and lenders will look at how the consumer is managing other credit obligations like credit card accounts or car loans. High balances and late payments don’t look good no matter where they occur.

Surprisingly, it turns out that if you have a good overall credit history, your credit score will suffer more than if you were already a historically known credit risk. The negative impact on a credit score is more severe on a credit report that has no history of missed payments and has low balances on active credit accounts. The impact is less severe if there are already indications of high-risk behavior like missed payments already being reported because the negative history has already impacted the credit score which will always start out be lower because it is reflecting the higher risk.

This means that whether or not a short sale will have less impact on a credit score than a foreclosure depends on the specific credit situation of the borrower in most cases. For most homeowners will average credit histories, a short sale should have less negative impact on their credit score than a foreclosure will, depending on the specific details of the borrower’s history.