Stuck in a house you can’t afford or can’t sell for more than you owe on it? Beware the Internet, where you will see plenty of claims that state short sales will save your credit, simple as that. But there is nothing simple about deciding whether to sell your house in a foreclosure or in a short sale, which means you sell the property for less than you owe the bank. And in most cases, going through either process will wreck your credit score.
Both short sales and foreclosures are considered negative by the score, because most data systems show it as being very predictive of future credit risk. The claim that doing a short sale is not going to hurt your score is false and inaccurate.
Credit scores, which are designed to assess how likely it is that consumers will uphold their side of the bargain, look at the severity (are we talking bankruptcy or a late car payment?), frequency (have you skipped a payment once or have you missed several payments?), and how recently (did you miss a payment last month or last year?) of items on your credit report. In both short sales and foreclosures, you made the loan holder take a great loss.
That is not to say that there are not some instances where short sales are better. If a borrower is current at the point of a short sale, for instance, then the consumer’s credit score will not sink as far as it would have if he had not made a mortgage payment for 6 months. Still, Fair Isaac says that the benefit from not having prior delinquencies on file pales when compared with the hit a score takes from a short sale.
If you are having mortgage trouble, seek help right away from a housing counselor or an attorney. Realtors are the go-to professionals to learn about the local housing market and what it takes to sell your home. They may not be credit experts, but they have valuable resources and may be able to steer you towards help. Do not pay someone a lot of money if they promise to quickly rehab your credit score after foreclosure. Credit scores are forgiving—over time.
Even if you do your homework, you ultimately can’t control how your housing woes are reported to the credit bureaus. For example, mortgage servicers may report your situation to the credit bureaus using different codes that could be interpreted more or less favorably by FICO.
Credit scores play such a central role in consumer’s lives. Yet it is so hard to understand them that people can end up making disastrous choices based on myths that are taken as fact. It is certainly not a catchall solution, but Congress should at least grant consumers free access to their credit scores, an idea which is currently being floated at the capitol.
If you or anyone you know needs short sale help or has any questions, feel free to call us anytime. We are so happy to help.