A study on the effect of short sale and foreclosure on credit report
If you have a mortgage debt to pay off, you must do it fast. Being a delinquent in your mortgage payments can really have a very negative effect on your credit report. You may also have to get your property foreclosed or you may have to sell off your property at lower price, which is called short sale. But you do need to know the difference between the two before you carry on with any of these. Both of the ways to get rid of your mortgage debt is not advisable. You can go for loan modification if you want to avoid foreclosure and short sale.
What is foreclosure?
Once you purchase a home, you take out a mortgage to pay for it. The lender is supposed to keep a security interest in the property. If you’re unable to make payments on your mortgage, your lender forecloses your property on the basis of the security interest that is, sell off your property in an auction and keep the proceeds to recover the mortgage money. If the amount that comes from the proceeds of the auction, doesn’t cover the mortgage, you need to pay the deficiency amount.
What is short sale?
Short sale is another way to get rid of your mortgage payments. If your mortgage payments are more than the value of your house, you can sell off your property at lower price and that is what is called short sale. This is the way to avoid foreclosure on your property and save your credit report from further damage. But here too, you need to pay the deficiency amount as you have to do in case your property gets foreclosed.
What is the effect on the credit report?
The credit score does get negatively affected in both the cases of foreclosure and short sale. In foreclosure, your credit score reduces 250 points and remains for 7 years in your credit report. The same happens for short sale but the point deduction is 80 to 100 points. So, of the both, short sale is better. If you want to take out a loan or a mortgage, you need to wait for 3 to 4 years in case of foreclosure while you need to wait for 2 to 3 years in case of short sale. If you can improve your credit report in a matter of 2 years after your property gets foreclosed and have a stable financial status, you can get the loan you need. In short sale, if the financial
status and your credit report get better, you can take out a loan. But the lending of mortgage and loans depends completely on your lender.
What is the alternate to these 2 options?
If you really want to save your house from getting foreclosed or from short sale, you can go for loan modification and get your loan terms modified. You need to show to your lender that you’re facing hardships and your credit score has to be good. You may get your loan term period increased or your rate of interest reduced. Your credit report does get reduced by 150 points but you at least retain your property and can again increase the value of your property.
You need to think about your credit report first before you take help of any of these options. Your credit report gets affected negatively in all these situations so you must try to pay back your mortgage regularly.
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