Short sales not always better than foreclosure

Featured Credit Card

Either one gets you bad credit, and mortgage lenders won't cut you any slack credit-wise because you sold the home rather than letting it go into foreclosure. In both cases, the lender loses money and in both cases you are defaulting. So if you are looking at losing your home because of money problems, you may be better off hanging in there to the bitter end (and putting aside money to move) than short-selling and leaving before you have to.

But sometimes they are

Your other option is to agree to a short sale or a deed-in-lieu of foreclosure (in which you voluntarily relinquish the home early, saving the lender the cost of foreclosure proceedings). Deeds in lieu of foreclosure and short sales are voluntary and take place outside the judicial system. That means there is room for negotiation. What you want in a perfect world is a complete walk-away and a "paid-satisfactory" or at least "paid-settlement" on your credit report. The lender may state that it can't do this but in fact it can. Another point for negotiate is the reporting of a balance owed. Some lenders report a short sale without including the amount of debt the borrower didn't repay.In that case, your credit score takes a smaller hit--about 35 points smaller according to FICO.

Finally, if you expect to be in a better financial position fairly soon, and want to buy a home again. a short sale may be the better option. If you're current on your mortgage and undergo a short sale, you still could qualify for an FHA mortgage, assuming that your credit score is at least 580. ith a foreclosure or deed-in-lieu, you'd have to wait three years.

Damage control: what happens to your credit score?

FICO looked at three scores when determining the effect of mortgage credit problems: 680, 720, and 780. In a foreclosure or short sale, the 680 folks lose 85 to 105 points; the 720 crowd loses 130 to 150 points; and 780 people lose 140 to 160 points. So the lower your score in the beginning, the less you have to lose. presumably people with already-bad credit lose even less.

Mortgage lates hurt less when you have bad credit

Many people think that being 30+ days late on a mortgage won't hurt you much. But it does, a lot more than a late payment on a credit card. Being 30 days behind is almost as bad for your score as 90 days is.

FICO found that those with 680 scores lost 60 to 80 points whether they were 30 or 90 days late. Those with 780 scores lost 90 to 110 points after a 30 day late; 90 days delinquent dropped the score only another 20 points.

A homeowner with a 680 score takes nine months to recover from a late mortgage payment, but one with a 780 score takes three years to get back to 780 because he or she has farther to go. Late payments on home loans for people with bad credit do less damage because they have less ground to make up.