Short Selling vs. Foreclosure: Understanding the Impact on Your Credit Score

Financial difficulties can sometimes lead homeowners to consider options like short selling or foreclosure. While both of these methods involve selling a home for less than what is owed on the mortgage, they have different implications, especially when it comes to your credit score. In this blog post, we will explore the differences between short selling and foreclosure and how each can impact your credit score.

Short Selling and Its Impact on Credit:

Short selling involves selling your home for less than the outstanding mortgage balance, with the lender's approval. Here's how it can affect your credit:

Credit Score Impact: A short sale will typically have a negative impact on your credit score. The extent of the impact will depend on various factors, such as your previous credit history and the reporting practices of the lender. On average, a short sale can lower your credit score by 100 to 150 points or more.

Credit History: The short sale will remain on your credit report for up to seven years from the date of the sale. During this time, lenders and creditors will be able to see the record of the short sale, which may impact their decision when considering you for future loans or credit.

Debt Settlement: In a short sale, the lender agrees to accept the proceeds from the sale as full satisfaction of the debt. However, it's essential to understand that the remaining debt may still be reported to credit bureaus as a deficiency balance, potentially affecting your credit further.

Foreclosure and Its Impact on Credit:

Foreclosure occurs when a homeowner fails to make mortgage payments, leading the lender to take legal action to repossess and sell the property. Here's how foreclosure can impact your credit:

Credit Score Impact: Foreclosure can have a severe negative impact on your credit score. The exact decrease will depend on several factors, but it can generally lower your score by 200 to 300 points or more.

Credit History: A foreclosure will remain on your credit report for up to seven years from the date of the first missed payment. This negative mark can significantly impact your ability to obtain new credit in the future.

Future Loan Applications: Foreclosure can make it challenging to qualify for new loans or credit cards for several years. Lenders may consider a foreclosure as a sign of financial instability and be hesitant to extend credit to someone with a history of foreclosure.

Choosing Between Short Selling and Foreclosure:

While both options have negative consequences, a short sale is generally considered less damaging to your credit compared to foreclosure. By proactively working with your lender and attempting a short sale, you may have more control over the process and potentially mitigate some of the credit score damage.

Both short selling and foreclosure can have significant implications for your credit score. However, a short sale is generally considered less detrimental to your credit than a foreclosure. If you find yourself facing financial hardship and unable to keep up with mortgage payments, it is essential to consult with attorneys, our attorneys for the best possible situation. Remember, understanding the impact on your credit can help you make informed decisions and take steps toward rebuilding your financial stability in the long run.

If you are interested in learning more about working with the Law Offices of Senerchia & Sheehan on your short selling or foreclosure , reach our offices today! 

Schedule a call with one of our attorneys today: 401-615-3880

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