One of the best explanations of how a short sale affect ones credit score was written by Brian Beres and really gives the consumer the information they need to make an informed decision.
1st, In order to understand what impact a Foreclosure or Short Sale has on your credit report you must first know that one’s “Payment History” is 35% of their overall score and “Amounts Owed” is 30% of one’s score. So someone’s “Payment History” which means how one pays their bills, either on time or late and “Amounts Owed”, which means outstanding balance of the original loan or lien, together these 2 categories equal 65% of one’s overall credit score each month!

2nd, Credit scores are graded and re-calculated each and every month. Any accounts that are reported on ones credit will be updated monthly and reflect the accounts “Payment History and Amounts Owed” among other things such as Inquiries, New Credit and Length of Existing Accounts”.

Let’s get right down to it…

Round 1
Anyone who has a mortgage, whether it be a 1st, 2nd or H.E.L.O.C. who is late 30 days or more on their payment/s, will have their credit report impacted negatively each and every month with a late payment shown on their credit report. Each mortgage late that is reported on ones credit report has an “Average” 20 point reduction of the score. So if someone has not paid their mortgage payments for 5 months that would equate to a 100 point decrease in ones credit score. If someone let’s say has a 1st and 2nd mortgage and misses 5 payments that would equate to a 200 point decrease in their credit score. The longer one goes without making a monthly payment the lower the credit score is going to go, regardless of what the persons plans are, meaning should the person let the property go into Foreclosure or sell it as a Short Sale. Each and every late payment counts against you!

Round 2
Once someone has 4 or more mortgage lates reported on their credit report, the credit bureaus automatically update the credit report with a term shown under the account name saying “Foreclosures Proceedings Started”, regardless if the person is going to let their property go into Foreclosures or put the property up for sale as a Short Sale. The credit bureaus recognize that after 120 days late, which is 4 months, that the Lender will issue a “N.O.D.” Notice of Default and start Foreclosure Proceedings. So again if a customer who is not making their payments is pass due 4 or more payments, their credit report has already been impacted and will reflect “Foreclosure Proceedings Started” no matter if the property is up for sale as a Short Sale.

Round 3
Lenders only report to the credit bureaus if someone has paid their account on time or if they are late, and again each late counts against that person, no matter if the house is going into Foreclosure or being sold as a Short Sale. If a property is up for sale as a Short Sale, and the customer continues to not make their monthly payments, then each and every month there will be another mortgage late reflecting on the person’s credit report, which will continue in the lowering of their credit score each and every month until the account is settled by either Foreclosure or Short Sale.

Round 4
If a property goes into Foreclosure, naturally it will be reported on ones credit report as “Foreclosure”. If a property is sold as a Short Sale, it will be reflected on ones credit report as either “Paid Less than Full Balance” or “Settled Less than Full Balance”. So what do these terms mean when that person wants to apply for a new home loan down the road? Well, in the world of Home Lending, the terms Foreclosure, Paid Less than Full Balance and Settled Less than Full Balance, all mean the same thing to us as Loan Officers and an Underwriter when reviewing ones credit report. If a property was Foreclosed upon or was sold in a Short Sale and reflects the account as Settled, the CURRENT Underwriting Guidelines State that the customer may have to wait anywhere from 2 to 7 years to obtain an Home Mortgage Loan depending on the customer and situation with each case being looked differently.

Round 5
Last but not least, either of these accounts can remain on ones credit report for up to 10 years! People who pull credit reports for employment purposes, credit purposes or for any other reason, all know that the terms: Foreclosure, Paid Less than Full Balance or Settled Less than Full Balance, all mean the same thing, the account was in distress and not paid on time and was either Foreclosed upon or Sold for Less than the Full Balance, which does not look good to the person who is viewing ones credit report.

Round 6
It’s a draw! A Foreclosure VS. Short Sale has the same negative impact on ones credit report because the way that Lenders currently report the account to the credit bureaus. Neither way is going to report better nor worse on ones credit score, they are both the same. The more payments that one is late on, the lower ones credit score is going to be regardless of what the person does with property. This is very important to know when asked how a Foreclosure or Short Sale is going to affect ones credit score.

Thank you for taking the time out to read this. If you have any questions, comments or concerns about what’s mentioned above please feel free to contact me at anytime, thank you!