If you’ve fallen behind on your mortgage, if your home is currently under water, or if you don’t anticipate being able to continue making your home payments, then two options you may want to consider are foreclosure or a short sale. While both can have a negative effect on your credit score, they both act differently. Here’s a closer look at each option and how they can affect your score:
Mortgage’s trial
Foreclosure occurs when you have defaulted on your home loan and the bank repossesses your home.
The Good: Foreclosure allows you to walk away from your home, which is valuable if your current mortgage is higher than the value of the home.
The Bad: Foreclosure takes a heavy toll on your credit score and will stay on a credit report for up to 7 years. It is estimated that a score can drop 100 to 150 points after a foreclosure, but that’s not the worst. The worst part is that you may not be eligible to buy another home or qualify for a loan for at least 2-5 years depending on the laws in your state.
dirty shorts
A short sale is an agreement with the bank that you will sell your home for less than you owe if you can no longer make the payments as is:
The good news: You, not the bank, control the sale. It’s also a more responsible way to move away from your home and qualify to buy another home immediately, in some circumstances. However, if you fell behind on your payments, it may take at least 3 years before you can qualify for an FHA loan.
The bad: Your credit score will still take a hit, anywhere from 50 to 130 points in some cases. And while credit bureaus don’t show a “short sale” on a report, they can still identify that you settled for less or paid in full for less on a report, which can jeopardize future loan opportunities.
If we were to give you one piece of credit advice, it would be to not bite off more than you can chew when it comes to buying a home in the first place, as this reduces the chance of foreclosure and short sale. And unlike other credit repair situations where debt management or financial responsibility can go a long way toward improving your score, foreclosure and short sales can be that red flag on your credit report. for several years, making it very difficult, if not impossible, to get approved for a loan, let alone good interest rates.
