The Impact to Credit: Short Sale Vs. Deed in Lieu

Credit scores provide lenders with an assessment of people's creditworthiness. Those with high enough credit scores can get loans at the best rates; those with low credit scores may not be able to get loans at all. Sometimes a person with good enough credit to qualify for a loan still winds up defaulting. Homeowners have a few options if faced with this situation; a short sale or a deed in lieu of foreclosure may be used to avoid foreclosure proceedings.

Foreclosure

The mortgage company has the right to begin foreclosure proceedings against borrowers if they fail to make mortgage payments for a number of months. If the mortgage company is successful with the foreclosure, the negative mark will remain on the borrower's credit report for at least seven years. Foreclosure remains one of the largest flaws on any credit report.

Options

The mortgage company generally tries to avoid foreclosure because it is costly to the lender. Additionally, if the lender has acquired a number of other foreclosed properties, this can affect its ability to lend. Often, the lender is willing to work with borrowers to reach an agreement for repayment. However, if this is not possible, the lender may agree to a short sale or a deed in lieu of foreclosure. Using either a short sale or a deed in lieu will prevent a foreclosure from appearing on the borrower's credit report, but the credit score will still suffer a negative impact. However, using one of these options may allow the borrower to obtain another mortgage loan more easily in the future.

Deed in Lieu

When using this option to avoid foreclosure, borrowers willingly give their home back to the lender. They sign a deed granting their interest in the property to the bank. The lender usually requires that the home be placed on the market for a period. If the home sells, the lender doesn't have to take responsibility for selling the home.

Short Sale

The short sale allows the home to be sold for less than what is owed on it. This may appeal to potential buyers because they may be able to purchase a home at a below-market price. The lender must give the OK for a short sale and sets the minimum price.

Considerations

Depending on the option a borrower facing foreclosure chooses, the mortgage company will report to the credit bureaus. When a deed in lieu or short sale can be agreed on, the mortgage company generally reports it as a "paid settlement." This will impact a credit score by 50 to 150 points. Generally, lenders will allow for another mortgage loan two years after a short sale and four years after a deed in lieu, per the Fannie Mae and Freddie Mac guidelines. A foreclosure listed on a credit report can lower the score up to 250 points. Additionally, it will be five years until another mortgage loan can be obtained. Since a foreclosure takes longer to process than a deed in lieu or short sale, negative marks can continue to be reported until the foreclosure is finalized.

References

• Nolo.com: Short Sales and Deeds in Lieu of Foreclosure
• Bills.com: Deed in Lieu of Foreclosure vs. Short Sale
• My Fico: What's in your Fico Score?
• Privacy Matters: Foreclosure and Your Credit History
• Zenith Property Solutions:Short Sale VS Foreclosure VS Deed-In-Lieu of Foreclosure; which of these represents the best choice for a homeowner in distress