In the aftermath of the housing market collapse, the incidence of foreclosure and short sale was very common in the country. Though in the current times, the property market is showing some signs of improvement. Foreclosure and short sale are still very serious issues in the country. In case of foreclosure, the struggling homeowners have to surrender their homes to the lenders and in case of short sale, the borrowers are allowed to sell their homes for less than the debt they owe. Both these mortgage moves ruin the credit score of the borrowers.
Basics of foreclosure and short sale
If you are unable to repay your mortgage dues and if you are not even offered a workout plan so as to go on making your mortgage payments, then your property is foreclosed. In this event, your property is taken over by the lender and is sold off in an auction in order to recover your dues. Sometimes, it may be the case that property market condition is not good enough and the property sale proceeds may be less than the mortgage balance that you owe. In that situation, the deficient amount has to be borne by you.
Again, in case of short sale, your lender accepts an offer for the house which is lower than the amount of money that you owe on the mortgage loan. This takes place in case you are behind on your mortgage payments and want to avert the serious negative consequences of foreclosure. Again, if the property market is in down turn, then the proceeds from the sale of property may not cover the entire loan balance.
Effects of foreclosure on credit score
Foreclosure has severe damaging effect on credit score. If you are not able to rebuild your credit after foreclosure, you may not get approved for a home mortgage loan at all. In case, you get approved for a mortgage at all, you have to pay a very high rate of interest. Not only the lenders, your employer also take your credit score very seriously. If you don’t have a good score, your chances of getting a new job are also seriously hampered.
If your property gets foreclosed, your credit score also gets reduced by 250 points. Given these severe credit damaging effects, you must put in serious efforts to avoid foreclosure. All the options to avoid foreclosure have to be explored. Again, foreclosure shows up on your credit report for around 7 years. But, foreclosure mainly affects your score in the first couple of years. You need to however start the process of rebuilding your score. With time, your credit score improves.
Effects of short sale on credit score
The credit damaging effects of short sale are much less than the credit damaging effects of foreclosure. If you opt for short sale, your credit score gets reduced by only 75-100 points. Importantly, short sale is a much faster and less costly mortgage process than foreclosure.