Foreclosures and Short Sales Affect Your Credit the Exact Same Way

As a homeowner, if you are behind on your mortgage payments, I would encourage an effort to complete a short sale. The attitude and timelines of lenders vary.

I am working on a short sale with  I am pleased with the program they have created for working with their mortgage holders. I am even happier with their system for working with real estate agents. Every time I have called, a representative answers the phone in a timely fashion and every person to date that I have spoken to has answered all my questions, and has been helpful. 

Short sales do require patience; they are not instant, and it takes time to get a final response and acceptance. However, they are being done with patience and attention to short sale requirements from individual lenders.

When in default on a home mortgage, an item to consider is the protection of one’s credit score. The FICO score was created in 1956 by engineer Bill Fair and mathematician Earl Isaac. They developed the FICO score as a measure of credit risk, and it has become the most used credit score in the world. The FICO score provides lenders with a fast and objective method of evaluating an applicant’s credit worthiness. This system demonstrates consistency, evaluates the same issues for each applicant, and can offer a risk factor.

According to MyFico.com, there is no difference in the effect of a credit score if the property owner goes through foreclosure or selects and achieves a short sale.

“Credit bureau reports are limited in how they represent foreclosures today, so it's generally not possible to tell from the credit report if a reported foreclosure is a short sale, deed in lieu of foreclosure, settled account, regular foreclosure or some other variation,” the website states.

All of these delinquencies are equally serious, and will have the same impact on the FICO score. Short sales are reported as “not paid as agreed.” 

A foreclosure or short sale is treated as a single account that will show as a default on a credit report. The option of bankruptcy will have a greater impact to a FICO score as it will affect multiple accounts, and therefore has a greater potential for a negative impact.

It is standard that any negative credit information will stay on a credit report for a maximum of seven years, and some information may remain longer. A bankruptcy is a public document that will remain on file for 10 years.

In addition to the above, California has its own rules affecting its residents: 

• Paid or released tax liens remain on file seven years from the date released or 10 years from the date file,
• Unpaid or unreleased tax liens remain 10 years from the file date and
• All consumer-initiated inquiries for the purpose of obtaining a loan and/or benefit remain on the file for two years

A foreclosure or short sale for a borrower may have other tax ramifications or carry other risks to a borrower with this cancellation of debt. These issues should be reviewed and considered by other legal or tax professionals. However, both forms of nonpayment of debt are reported on your credit record with a negative impact. Both processes affect your credit score in the exact same way.

Beverly Taki is a California-licensed real estate broker who has represented clients in Malibu for 22 years. She is a Malibu resident and president/broker of Seabreeze Estates Realty. Taki can be reached at beverly@beverlytaki.com or 310-456-4843. Her website is beverlytaki.com.