Many of our Orange County clients ask us how a Short Sale will effect their Credit Rating ? That is a valid and important question, which we will address herein. First of all, this question really needs to be compared to an alternative to give the answer meaningful relevance. The two alternatives to a Short Sale for eliminating mortgage debt, where the Orange County home is worth less then the total debt, is foreclosure or bankruptcy. (There is a third alternative called deed-in-lieu of foreclosure, but mortgage banks almost never go this direction, and the effects on credit are very similar to a Short Sale.)
First the disclaimer – trying to predict the exact outcome of ones credit report is very difficult. The reasons why are many; One, your credit is effected by many variables and it is difficult to isolate the effect of just one variable. Two, the calculation of your FICO score is a constantly evolving process, and the factors that were used 6 months ago, may not be the same factors they use today. Three, your credit rating is composed of three different credit reporting agencies (Equifax, Experian, TransUnion), and they each use different processes and techniques to calculate ones FICO score.
Based upon our experience and reports from other experts in the field, a short sale is about 100 to 200 points less damaging to ones FICO score, compared to a Foreclosure, and about 200 to 250 less damaging then Bankruptcy. The primary damage to the credit rating is not the actual short sale, but the months of late payments. So the less the number of late payments, the better to a certain a degree. Not only is the FICO score reduction a factor to consider, but also of importance is the length of time the credit is negatively affected.
A Foreclosure will stay on ones credit report for about 7 years, while the effects of a Short Sale are several years less then that. In addition, there is another positive benefit of a short sale compared to foreclosure regarding shortening the delay to renewed loan worthiness. Fannie Mae (FNMA) recently changed their underwriting policy for purchasing mortgages from Banks. A past Orange County home owner has to wait 5 years after a Foreclosure Sale before FNMA will underwrite a new mortgage loan. But, if the Orange County home owner conducted a Short Sale, then the wait time for a new loan with FNMA is just 2 Years !
Finally, we have established a association with a credit restoration company, that has worked with many of our past short sale clients. This company has been able to make substantial improvements to our clients credit scores, who credit was negatively effected by a short sale. But this company has a very difficult time improving ones credit after a foreclosure.
There are other benefits to a Short Sale for Orange County home owners, as compared to foreclosure or bankruptcy, which we will discuss in following articles. We published an eBook called “Should I Short Sale My Home?“. For the time being, we are giving this away for FREE.. so just click on the previous link to get your copy. For more information or questions, please fee free to contact us at: 949-388-3396 or drop us an email at: Info@ShortSalesASAP.com
