One of the questions we hear from members is “Will a short sale damage my credit?”


In short, yes.  In fact, there’s no real credit rating advantage to a short sale over a foreclosure.  Credit will be negatively impacted after both.  Your lender will report the financial loss as a major derogatory event on your credit record whether it’s a short sale or a foreclosure.


Here’s the difference:


A foreclosure occurs when a homebuyer doesn’t make their monthly payments on a mortgage loan.  The lender then uses its legal right to foreclose on the home and take possession.  The home is first offered for sale at auction.  If there are no buyers willing to pay the opening bid, the house reverts back to the lender.  The lender will use a traditional sale process and apply the sale proceeds to the unpaid mortgage balance to recover all or part of the loan amount.


A short sale is selling your home for less than the balance of the mortgage loan.  The mortgage lender must approve this option in advance after the homebuyer provides a letter of hardship, proof of income, assets and bank accounts, along with a comparative market analysis to prove that the local property market does not support selling the home for the full mortgage loan amount.


There may, however, be differences in how a short sale and foreclosure impact your life and credit score.


Here’s why:


When a lender forecloses, credit may be more severely damaged than with a short sale because of the impact of ongoing late payments prior to foreclosing.  In a short sale, often the borrower hasn’t missed a payment.
In a short sale, the homeowner controls the transaction and can remain in the home through a traditional realtor-involved transaction.  The lender is able to avoid the costly and lengthy process of a foreclosure and the borrower is able to avoid the unpleasant process of an eviction and a public sale of their home.


One big advantage in a short sale is how you may appear to a prospective lender.  Credit bureau scoring models and lenders tend to be more forgiving if the loan is marked “settled,” as in a short sale, compared to a record of “default,” as in the event of a foreclosure.  For a little perspective, in the event of a foreclosure, Fannie Mae and Freddie Mac typically won’t lend to you again for five years.  However, in a short sale, that timeframe shortens to two years.


If you are struggling to make ends meet or are considering a foreclosure or short sale, we encourage you to reach out to your lender now.  The sooner you act, the more time and flexibility you have for resolution.  Fully explain your situation to your lender. Your lender doesn’t want your house, they want your payments. Show them you’re making an effort toward repayment and ask for options.


If you’re having difficulty making payments on a first or second mortgage loan with us, call one of our specialists for help. To determine the best way to assist you, we will work with you to review your financial situation and identify your options.  Complete a Financial Worksheet and fax to (925) 609-3262.

by Chris, Vice President, Lending