FICO: Short sale no better for your credit score than foreclosure
For borrowers going through the frustration of trying to market their home as a short sale, the big selling point generally is the thought that it's not as bad -- from a credit-score perspective -- as a foreclosure.
But that doesn't appear to be true, the folks at FICO say.
The credit-score company says on its analytics blog that it compared the effect of both types of distress sales on the scores of three different types of consumers. A foreclosure and a short sale represented an equal hit to the FICO score of all three, FICO said. (Thanks to HousingWire for noticing.)
One commenter on that blog takes issue with the suggestion that it's all the same, arguing that someone who needs a security clearance would be out of luck with a foreclosure in their past and thus has a reason to push for a short sale. But it's not clear that defense officials see a difference, either.
Sheldon I. Cohen, an attorney who focuses on security-clearance issues, writes that the Department of Defense's Office of Hearings and Appeals has granted clearances to some with a short sale in their background and some with a foreclosure in their past, and it's also denied clearances to people who had a foreclosure or a short sale. The key is "good faith and moral behavior," he writes:
The common thread in all of these cases is that: (1) applicants were victims of circumstances not of their own doing; (2) they had not been speculators in the housing market who were caught when the bubble burst; (3) they had not succumbed to fraudulent schemes "too good to be true" as a result of their own greed; and (4) they had made good faith efforts to meet their other debts after the loss of their homes by foreclosure or short sale.
What do you think, guys? Anyone see an upside to a short sale -- from the exiting homeowner's perspective -- compared with a foreclosure?
Categories: Credit score, Distress sales, The foreclosure mess
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Comments
A Note on that FICO!: Look BEYOND that number everyone! Don’t get 'hyperfocused' on the FICO number. Here’s why: provided you have rebuilt your FICO to a decent number, you can purchase another home in 1-2 yrs after a short sale! You simply do not even have that option after a foreclosure – not for 5-7 years! Think of the impact on your family, kids, schools, lifestyle, opportunities. "Credit" has many more dimensions than just a number. Also, you don't have to answer 'yes' to the dreaded “Foreclosure question” on numerous forms and applications we all complete multiple times a year. This dreaded foreclosure inquiry is found in mortgage applications, loan applications (even a simple signature loan), job applications, interim employment security clearance after you are employed, credit card applications, starting your own business or even partnering into a business, buying a car, property insurance, auto insurance, employment. Quite simply, most folks are short sighted when it comes to the FICO. Think beyond the FICO and reread above.
Posted by: Elizabeth Kayser | April 26, 2011 7:43 AM
FHA puts foreclosure and short sale in the exact same 3 year penalty box. It is true that FHA technically allows a previous short sale….as long as it wasn’t really a short sale. If “the proceeds from the short sale serve as payment in full,” then it wasn’t a short sale.
“FHA insured mortgages are generally not available to borrowers whose property was foreclosed on or given a deed-in-lieu of foreclosure within the previous three years.”
Fannie Mae technically allows 2 years after a short sale and 7 after a foreclosure, but there are catches that make the practical impact very much the same. The individual lenders have their own additional requirements that exceed Fannie Mae’s requirement, and if you want to put down anything less than 20% you need to wait the full 7 years.
From FHA/HUD:
http://www.fha.com/fha_requirements_credit.cfm
“Borrowers are considered eligible for a new FHA-insured mortgage if
• they were current on their mortgage and other installment debts at the
time of the short sale of their previously owned property, and
• the proceeds from the short sale serve as payment in full.”
But…..
“Borrowers in default on their mortgage at the time of the short sale (or preforeclosure sale) are not eligible for a new FHA-insured mortgage for three
years from the date of the pre-foreclosure sale”
http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-52ml.pdf
Posted by: Josh Dowlut | April 26, 2011 2:46 PM
The main difference is that the foreclosure stays with your credit report longer than a short sale even if the initial hit is the same.
Posted by: Wayne | April 27, 2011 2:38 PM