If a homeowner is able to carry out a short sale to prevent his home from being added to lists of foreclosure VA and other foreclosures, it is generally known that the short sale will not affect his credit score as much as a foreclosure does.
But according to John Ulzheimer, former credit score model developer at credit bureau Fair Isaac Corp., short sales are major delinquencies and they have significant effects on credit scores.
In the recent expansion of the Obama administration’s program to contain foreclosure VA and other foreclosures, federal officials launched alternatives to foreclosures, including short sale and loan forbearance. They informed homeowners that they can protect their credit record if they can work out a short sale.
Sadly, it is not case, according to Ulzheimer, who worked at FICO for many years creating models for credit scores. He said that FICO treats short sale as a major delinquency and that basically the credit score effect of short selling is the same as the effect of foreclosure VA and other foreclosures.
However, Matthew Adler, loan executive at North Star Home Lending, said that based on his experiences with many borrowers he has helped, the credit score effect of a short sale varies. A short sale can reduce the credit score by about 70 to 350 points, depending on what FICO sees in the financial activities of borrowers.
Meanwhile, the popular belief is that foreclosure damages the credit score completely, making former owners of foreclosure VA and other foreclosures unable to get a major loan within ten years after the foreclosure.
According to Ulzheimer, short sales are reported on the FICO system as a charge-off, a settlement or a foreclosure filing, which are all considered major delinquencies by FICO.
He added that persons with good credit scores are affected most by short sales. Often they will see their credit scores falling by more than 100 points after the short sales are recorded. For instance, he said, a person with a score of 750, which is a very good credit level, can see his score go down to 600 through 575 after a sale is completed and posted.
A short sale, Ulzheimer added, will stay on credit records for 7 years.
All in all, although short sales, forclosure VA and other foreclosures affect credit scores, short selling is a better option if only for the less number of years suffered as a result of low credit scores.
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- Buyer’s Corner: How to Keep Credit Clean
- More Mid-Priced Homes in Pasadena Foreclosure Listings
- Foreclosure Option 6: Short Sale
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