Foreclosure vs. Short Sale

Oh boy, is this a hot topic!

So, before we get any further, I want to clarify once again that this is not a commentary on what is morally correct (if morals even play a part), what one should or should not do when faced with this choice, etc. We are strictly speaking about what happens on your credit report and how some mortgage lenders view the subject.

What is a foreclosure? (Yes, we all know what a foreclosure is...but humor me for a moment...) When home forecloses, whether it's done through bankruptcy or involuntarily, the bank takes possession of the home. Your credit report will reflect the foreclosure under the mortgage(s) that were affected. While your home is in the process of foreclosing, you will have derogatory reporting of 30, 60, 90, and 120 day lates...typically with the notation "foreclosure started" or "notice of default."


What is a short sale? You sell your home at a mutually agreed upon price by a buyer and the mortgagor who will be taking a loss. Severe delinquency is usually a factor in this process (including the "foreclosure started" or "notice of default" notation on the credit report), and the shortage may also appear on your credit report as remaining balance...depending on the lender that is reporting.

What's the difference on your credit report?

According to John Ulzheimer, formerly of Equifax and Fair Issac (www.JohnUlzheimer.com), "They basically have the same effect on the score, but a foreclosure has a stigma that lenders shy away from, which in essence makes the foreclosure worse, even though the score drops equally."

Mortgage lenders certainly do shy away from foreclosures. No surprise there. In fact, many times just the word "foreclosure," as in "foreclosure started," may be enough thwart your home purchase activities depending on when it occurred.

Todd Vinther at Countrywide says that foreclosures and short sales are viewed essentially the same in mortgage lending. There are some rare instances in which, depending on credit score, loan vs. value, and an extremely good explanation that a loan can be approved...but again, it's rare.

This is not to say that you should lose heart if faced with this decision. There is life after foreclosure, short sales, and general bad credit. Whatever your situation is, DON'T MAKE ASSUMPTIONS! (You know what they say about assuming, don't you?) Ask for help! Ask early. Every person's situation and credit profile is different.

If you need some assistance in the decision making process...or just want to keep your home, where ever you are in the country, Alex Leon at www.ForeclosureStoppers.biz is a great resource for you.

For mortgage, contact my office by phone or email. We will put you in touch with a reputable lender (and I don't use that term lightly.)

If you need help with a credit report, damaged or otherwise...call us! That's what we're here for. www.RosettaCredit.com

And keep those questions coming!