The Effect of a Foreclosure v. Short Sale on Credit Scores: What Underwater Homeowners Need to Know
Before you begin the foreclosure or short sale process, you need to think about the impact it could have on your credit score. Why is it so important to consider your credit score? Because that number can affect your ability to buy another home, obtain additional credit¾in some cases, even whether you're able to get a job. Below, we've outlined some of things you need to know about foreclosures, short sales, and your credit score.
1. Both a short sale and a foreclosure will have a negative impact on your credit score. After you complete a short sale, your lender will record your mortgage as "settled for less than owed." If the bank forecloses on your home, you'll have a foreclosure judgment on your record. Each will cause your score to fall, but the foreclosure will have a more negative impact. In addition, foreclosures generally take longer to process than a short sale. That means that in foreclosure, you'll probably rack up more missed payments than you would with a short sale, further hurting your credit score.
2. You'll have to wait to buy another home. Because a foreclosure or short sale dings your credit score, it's going to affect when you'll be able to buy another home. When considering short sale vs. foreclosure, keep the following in mind: You'll probably have to wait three years to buy another house if you go through a short sale, but if you have a foreclosure judgment on your credit report, you may have to wait up to seven years.
3. A lower credit score could affect your security clearance, employment certifications or licenses. In some cases, your credit score can affect your eligibility for a security clearance. If you work in the financial industry, it might also affect your ability to maintain your securities license. A low credit score could also affect eligibility for other employment certifications. One way to address this problem is to try to time your foreclosure or short sale so that it happens shortly after your employer pulls your credit report for the year. That will give you the maximum amount of time to repair your credit and increase your credit score. In some cases, this could also be a factor in your decision to pursue a short sale rather than a foreclosure, since the former has a less negative impact on your credit score.
You can't avoid the negative impact of a foreclosure or short sale on credit scores. But you can make choices that will make it easier to improve your credit score after the foreclosure or short sale. One of these steps involves making sure you have accounts at more than one financial institution. Having a variety of accounts with different banks will make it easier for you to quickly rebuild your credit after the foreclosure or short sale.
Another thing you can do is take advantage of Homeowner 101's Underwater Homeowners Assessment and Action Plan. It will help you evaluate your different options if you're underwater on your mortgage and empower you to choose a path forward that makes sense for you and your family – including a plan for rebuilding your credit.
Homeowner 101 is an organization designed to give underwater homeowners Answers, Information, and Resources (A.I.R.). We offer the Underwater Homeowners Assessment and Action Plan, a resource for every homeowner who owes more than her house is worth – whether you're having trouble making your mortgage payment or not.
1. Both a short sale and a foreclosure will have a negative impact on your credit score. After you complete a short sale, your lender will record your mortgage as "settled for less than owed." If the bank forecloses on your home, you'll have a foreclosure judgment on your record. Each will cause your score to fall, but the foreclosure will have a more negative impact. In addition, foreclosures generally take longer to process than a short sale. That means that in foreclosure, you'll probably rack up more missed payments than you would with a short sale, further hurting your credit score.
2. You'll have to wait to buy another home. Because a foreclosure or short sale dings your credit score, it's going to affect when you'll be able to buy another home. When considering short sale vs. foreclosure, keep the following in mind: You'll probably have to wait three years to buy another house if you go through a short sale, but if you have a foreclosure judgment on your credit report, you may have to wait up to seven years.
3. A lower credit score could affect your security clearance, employment certifications or licenses. In some cases, your credit score can affect your eligibility for a security clearance. If you work in the financial industry, it might also affect your ability to maintain your securities license. A low credit score could also affect eligibility for other employment certifications. One way to address this problem is to try to time your foreclosure or short sale so that it happens shortly after your employer pulls your credit report for the year. That will give you the maximum amount of time to repair your credit and increase your credit score. In some cases, this could also be a factor in your decision to pursue a short sale rather than a foreclosure, since the former has a less negative impact on your credit score.
You can't avoid the negative impact of a foreclosure or short sale on credit scores. But you can make choices that will make it easier to improve your credit score after the foreclosure or short sale. One of these steps involves making sure you have accounts at more than one financial institution. Having a variety of accounts with different banks will make it easier for you to quickly rebuild your credit after the foreclosure or short sale.
Another thing you can do is take advantage of Homeowner 101's Underwater Homeowners Assessment and Action Plan. It will help you evaluate your different options if you're underwater on your mortgage and empower you to choose a path forward that makes sense for you and your family – including a plan for rebuilding your credit.
Homeowner 101 is an organization designed to give underwater homeowners Answers, Information, and Resources (A.I.R.). We offer the Underwater Homeowners Assessment and Action Plan, a resource for every homeowner who owes more than her house is worth – whether you're having trouble making your mortgage payment or not.