What are the CREDIT benefits of doing a short-sale vs. foreclosure?
There are two parts and scenarios that need to be considered for this answer. Let’s start with how it will be reported to the credit bureaus. While in cases, short sale and foreclosure, the delinquent mortgage will negatively affect their credit rating, at least short sellers will have type of verbiage stating that they worked out a deal with their lender. Such terms reported by lender are “debt settled for less than what was owed”, “debt settled”, “debt settled with agreement” or some other similar verbiage dependent on each lender. A short sale can possibly be less damaging to your credit point wise and there are cases where the damage was as little as 50-100 points, compared to a foreclosure which mortgage and credit experts say that, after bankruptcy, having a foreclosure on your credit report is the worst result and will possibly reduce your credit score by over 300-400 points.
The next situation that plays out as to your credit damage is whether you are late on your payments or not. Once you stop making payments lenders will report you 30, 60, 90 days late all the way out to 150 days late which all contributes to the degradation of your credit. If you have two loans then the damage can be even greater. People who are late on their payments will suffer much more severe credit damage than those who never miss a payment and do a short sale. And YES you can do a short sale even if you are not behind on payments. (See below)
People who successfully complete a short sale may also qualify for a mortgage at a reasonable interest rate in as little as 24 months. So, if buying a home is a future goal, then a short sale is the better option for many families. Fannie Mae and Freddie Mac have recently changed their guidelines (August 2008) stating if you have a short sale on your record you may be able to buy another home in 24 months with financing that is ultimately going to be backed by them. While if you have a foreclosure on your record you will have to wait 7 years with financing backed by Fannie or Freddie