Since the economy took a downturn in 2008/2009 there are still a larger number of homeowners who are underwater on their home loans meaning they owe more on their mortgage than their home is currently worth. This has lead homeowners to wonder what will happen to their credit should they put their home up for short sale or face a foreclosure.

This is good information to know because both of these things can end up on your credit report for seven years making your decision about a short sale or foreclosure a very important one. A loan in foreclosure will appear as just that on a credit report. You can expect to find the term clear as day written “foreclosure.” A short sale, however, does not show up in any one form on a credit report. It could be labeled as several things including: “charge off,” “deed in lieu of foreclosure, “and “settled for less than the full amount due.” All of these terms have a negative impact on your credit score.

So if all negative or derogatory information stays on your credit report for seven years does this mean that a short sale has the same impact on your credit report as a foreclosure? In some cases yes and in other cases no. This answer all depends on the surrounding information present on the report mainly the balance and past due amount of the loan being reported. The higher the amounts the lower your score will go.

The balance that appears on a credit report after the lender gives notice of foreclosure to the Credit Reporting Agency is made up of the entire amount still owed on the mortgage loan on the date that the property went into foreclosure. When a short sale is reported the balance is made up of the amount owed minus the amount the home was sold for with approval from the lender. So, in this case, the negative impact on your credit score would be less for a short sale than a foreclosure because the dollar amount reported is less. The higher the past due amount the lower your credit score goes. Typically foreclosures only have past due amounts and short sales show none also making a short sale less impactful on a credit score.

Though a short sale is less impactful on your credit rating and report you should still be mindful that it will have a negative impact on your report and could lead to more difficulty applying for loans in the future before those seven years are up.

Have more questions about your credit and how it will affect your chance to obtain a mortgage, contact me today.