When you’re facing a foreclosure, it’s best to do whatever you can to salvage your credit score. A short sale is often seen as a solution to foreclosure and as a way to protect your credit.


What is a short sale? It’s the sale of a home in which the net proceeds from the sale of the property will fall short of the debts. Essentially, it recoups some of the lender’s money, freeing the homeowner from the property debt. In a short sale, the lender must agree to accept less than the amount owed against the home since there’s not enough equity to sell and pay the entire cost of the sale.


While not all lenders will negotiate a short sale, it can be an effective way to avoid foreclosing on the property altogether. However, how much of an effect does a short sale have on the seller’s credit score?


Short Sales and Credit Scores

While a short sale might still be a better option than a foreclosure, they both have a similar negative effect on credit scores. According to Fair Isaac, the average points lost on a FICO score are between 85 and 160 for both a short sale or a foreclosure.


However, the difference comes in the reporting. For instance, a short sale will be listed as “pre-foreclosure” on a credit report, and this could make a big difference in just how badly the individual credit score is hit. Short sales tend to carry less stigma than a foreclosure, and this could help with the seller’s credit in the future.


How Does a Short Sale Affect Your Credit Rating? Home for Sale


Short Sale and Buying Another Home

One reason to consider a short sale over a foreclosure is that it has a much shorter waiting period to buy another home. A foreclosure on your credit record will keep lenders from considering you for a mortgage for upwards of 2 years.


On the other hand, the wait is much shorter for short sale sellers. The FHA has guidelines saying that a seller who is current on their payments and does a short sale can qualify immediately for a new mortgage. However, if there are any late payments or delinquencies over 30 days, this will slow down the process dramatically.


Choosing a Foreclosure or a Short Sale

When it comes to your credit score, a short sale won’t make a significant difference in how severely your credit is hit compared to a foreclosure. However, the waiting period to find a new home is shorter, and it is a less severe mark against you on your credit score than a foreclosure.


The level of damage you’ll experience from a short sale will most likely depend on how behind you were on your home payments. If you actively take measures to repair your credit after a short sale by paying bills on time, keeping credit balances low, and only taking on new credit on a limited basis, you can recover from a bad hit within a few years.


Unfortunately, it’s nothing but a myth that a short sale will have less of a negative impact than a foreclosure. Like most things regarding credit score, it will always be related to the individual situation. A short sale is a settlement with the lender and not a perfect solution. If you’re considering how a short sale will affect your credit score, talk to your lender about the best option for your situation. Many are willing to work with you to help you pay on time, become current, and protect your credit score.