Short Sales and Foreclosure in NJ: Which is Worse For My Credit?

Credit Impact of Home Foreclosure vs. Short Sale in New Jersey

Everyone knows that a foreclosure on your home can have a lasting impact on your credit score. According to the three major credit scoring agencies Equifax, Transunion, and Experian, a foreclosure shows up on a credit report for 7 years. Due to the lingering down turn in the housing market, many borrowers pursue alternatives to foreclosure such as short sales in order to protect their credit, but is a short sale better for your credit than foreclosure?

What is a Short Sale?

A short sale is an agreement where your lender agrees to release its lien and let you out of your mortgage for less than what is owed.  The home owner still needs to find a buyer and jump through the bank's bureaucratic hoops, however, the bank ultimately agrees to accept less money in order to satisfy the debt. In some cases, borrowers will agree to a deficiency after a short sale, but the typical short sale envisions the bank accepting less than what they are owed.

Short Sale on Your Credit Report

A short sale appears on the credit report as settled debt and depending on the credit agency will remain on a credit report for 7-10 years. So which option is worse for your credit score? A short sale may lower a credit score by 75-125 points whereas a foreclosure may lower a credit score by 200-280 points. Based on credit score, foreclosure is slightly worse for your credit than is a short sale. Consider this article from Transunion article:

Typically, foreclosures will lower a credit score by 250-280 points, and stay on your credit report seven years. If you continue paying other bills and credit obligations on time though, within three years your credit score could be robust enough to get you a new mortgage with a favorable interest rate.

When Your Credit Has Already Been Damaged...

It is entirely normal to want to preserve a high credit score. Good credit can make it easier to rent, or buy a home, lease a car, etc. However, be sure that your credit score isn't a goal onto itself. In many cases, we see clients liquidate 401(k) or retirement plans as a means of avoiding bankruptcy, only to be forced to file a few month later. One of the big things that prevents them from filing is their credit score. The lesson? Be mindful of the impact that certain events have on your credit, but don't let a score get in the way of what's best for you financially. Image credit