Credit Scores
“How Will a Short Sale Affect My Credit?”
Your credit rating affects your ability to procure financing and obtain favorable rates. FICO, is the most widely used credit scoring system manager in the world. FICO guidelines state the following go into your credit score:
- Payment History – 35% of score – includes past due, late payment data, derogatories, such as “paid as agreed”, bankruptcy, judgments, etc.
- Amounts Owed – 30% of score – including percentage of balances to credit limits
- Length of Credit History – 15% of score
- New Credit – 10% of score – includes credit inquiries, length of time to establish new credit following past payment problems, number of new accounts, etc
- Types of Credit Used – 10% of score – includes percentages you have of mortages, credit cards, installment loans etc
You can see that the biggest category on your credit is payment history. So outside of the short sale or foreclosure event, late payments, delinquencies and credit limits/balances all add up to affect your score. Each person’s situation will be different, so there is no exact number that can be quoted about how much your score will change if you do a short sale or have a foreclosure.
A short sale or foreclosure are both similar derogatory events on your credit score (score factor 22). However, a short sale may have a lesser impact on your future ability to borrow than a foreclosure or deed-in-lieu of foreclosure.
Fannie Mae, the nation’s largest backer of mortgages, recently announced that borrowers who just “walk away” from their home loans may be restricted from getting a new Fannie Mae loan for seven years. Further, Fannie Mae may also pursue deficiency judgments against those who choose foreclosure, stating they will take “legal action” to pursue unpaid balances. In Florida, a creditor has up to 20 years to collect!
After doing a Short Sale, however, you may be able to purchase a new home in as little as 2 years, or even sooner depending on your payment history and your arrangement with your Short Sale lender. The Fannie Mae policy clearly indicates that Short Sales are preferable to foreclosures. Following is an excerpt from the new policy guide and memo, where you will see future borrowing restrictions outlined :
“If the borrower is purchasing a new property and the previous mortgage history complies with our excessive prior mortgage delinquency policy and does not haveone or more 60-, 90-, 120-, or 150-day delinquencies reported within the 12 months prior to the credit report date, the loan is eligible for delivery to Fannie Mae, provided the lender or servicer who completed the short sale has not entered into any agreement that obligates the borrower to repay any amounts associated with the short sale, including a deficiency judgment.“
Other factors to consider withe short sale versus foreclosure is the benefit for applying for non-mortgage credit (such as car loans). You will be asked if you have had a foreclosure. If you have had either a “walk away” or deed-in-lieu (since it is a type of foreclosure), you must answer “Yes”. That will likely affect the interest rate you are offered. Finally, a short sale may have a lesser effect than foreclosure for your security clearance. If you are U.S. government employee or military member, check with your security officer.
In summary, a Short Sale is the best choice when it comes to ability to secure future financing.
