(My guest blogger for this issue is Chad Rogers, of CMR Consulting.)

Anyone faced with the threat of foreclosure may decide to look into a short sale as an alternative. As a credit coach I am often asked “How does this affect my credit?” and the answer is, it will hurt either way. Chances are that someone that who is facing the threat of foreclosure has already started damaging their credit score by being in default, that is, behind on their payments. People have reported FICO score drops from 50 – 130 points from a short sale and 200 – 400 points after a foreclosure, but rarely, if ever, are there isolated changes in a credit report that make any point difference traceable. Others have reported no significant difference in credit score drops between the two. Either way, both are unhealthy behaviors for a credit score, no matter how you look at it.

Credit score aside, a short sale should be looked into for other reasons. The primary reason a short sale is better than a foreclosure is the waiting period before you will qualify for another home loan. You should always check with a reputable mortgage professional for their unique lender programs, but typically, you can get another FHA home loan in three years. If you are in arrears and a short sale is still granted by your lender, you may qualify to buy another home with a Fannie Mae backed mortgage within two years, regardless of whether the home is your primary residence. With a foreclosure, you may be eligible to buy another home in five years if the home was your primary residence, but the wait time can be as much as seven years. An investor typically must wait the full seven years with a Fannie Mae insured loan.

A loan application does not ask if you have had a short sale, but you are required to answer the question of whether you have ever had a property foreclosed upon in the last seven years. Even if you are fortunate enough to get it removed from your credit report, you still must disclose this information or you risk committing mortgage fraud, which is subject to investigation by the FBI.

Be aware that the homeowner may still owe the difference between the mortgage balance and what the discounted sale price was, resulting in a “deficiency judgment.” If granted, this judgment will affect a credit report as much as any other judgment. To avoid this, in negotiations, the bank needs to accept the payment in full without pursuit of any deficiency judgments. However, the homeowner would then need to declare that difference between the balance owed and the short sale by means of a 1099 tax form. A lender cannot do both! Another negotiating point can be how the bank will report the short sale to the credit bureaus, so use that to your advantage if possible.

To summarize, both short sales and foreclosures are harmful to your credit. However, with time (generally less time with a short sale), honest reporting, and informed negotiations with the bank handling the sale, the average person will be able to move on to a brighter future after the experience.

*Always obtain legal and tax advice before making a decision between a short sale or foreclosure.

Chad Rogers, CMR ConsultingChad M. Rogers
Credit Coach & Professional Networker
CMR Consulting
Phone: 303-725-7385
FAX: 1-888-422-1804

Chad M. Rogers, a loving husband, father, and real estate professional for over 8 years, decided to pursue a career path in credit coaching because he genuinely loves helping people obtain the goal of home ownership. He is passionate about helping along the success of others, hence his favorite quote by Alexandre Dumas – “Nothing Succeeds Like Success.” After years of success as a top-performing title representative, Chad opened CMR Consulting, which focused on bringing products and services to the real estate community. He soon recognized the need for a trustworthy credit coaching partner and therefore expanded CMR Consulting to include these much needed credit coaching services. CMR Consulting is now the premier coaching company dedicated to educating consumers on credit and debt resolution. The goal is to only work with the very best real estate professionals helping fill the void in service to the public. CMR Consulting continues to help companies, families, and individuals improve their bottom line and services.