This is one of the hottest questions in the Minnesota short sale and foreclosure arena today. I have attempted to find the latest information from various sources but things change daily in this business.
Fair Isaac released a report that says credit scores are affected about the same, whether a seller does a short sale or foreclosure. Fair Issac says the average points lost on a FICO score are as follows:
- 30 days late: 40 to 110 points
- 90 days late: 70 to 135 points
- Foreclosure, short sale or deed-in-lieu: 85 to 160
- Bankruptcy: 130 to 240
- Foreclosure or Deed-in-Lieu of Foreclosure
Both of these solutions affect credit the same, says David Steep of Vitek Mortgage. Sellers will take a hit of 200 to 300 points, depending on overall condition of credit. This means if a seller’s FICO score before foreclosure was 680, it could dip as low as 380. - Short Sale
Steep maintains that the effect of a short sale (providing the sellers are more than 59 days late) on a seller’s credit report is identical to that of a foreclosure. The ding on credit will show up as a pre-foreclosure in redemption status, Steep says, which will result in a loss of 200 to 300 points. This means a short sale seller with a previous FICO of 720 could see it fall from 520 to 420.
My personal experience has been somewhat different. I completed a short sale for a Twin Cities seller who was 90+ days behind on his mortgage. A few months after his short sale closed, he checked his credit report and found his FICO fell by only 100 points to 671. I suspect every seller’s situation varies.
Purchasing a home after a short sale
Some agents say the good news for short sale sellers is the wait is much shorter before buying another home, and Fannie Mae guidelines in 2010 adopted new procedures.
Here they are:
Foreclosure or Short Sale Decision
If you’re a seller trying to decide whether to let a home go through foreclosure versus attempting a short sale, salvaging your credit may not be an advantage to doing a short sale, says Coy. She reports that according to “Score Factor Code 22, there’s no credit score advantage for a delinquent borrower on a short sale over a foreclosure.”
I have my doubts about that, though. From what I’ve seen, there is less damage to a credit report after a short sale involving late pays than a foreclosure. Moreover, another advantage for those with delinquencies on their credit is the ability to buy another home within 2 years over the 5- to 7-year period required for foreclosures. And there are other short sale advantages over a foreclosure. But seek legal and tax advice before making that decision.
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