Short sales are a huge industry today – and I am a (pretty big) proponent of short sales that are “better” for consumers and loan investors compared to other alternatives such as foreclosure. One of the big misconceptions about short sales, though, is that “they are better for your FICO score than foreclosure”…so I thought I’d go check out some primary sources of information on this topic…such as what the creator of the FICO score says about this question.
Here’s what www.myfico.com says about the question (start of www.myfico.com text):
Question: Are the alternatives to foreclosure any better as far as my FICO score is concerned?
Answer: The common alternatives to foreclosure, such as short sales, and deeds-in-lieu of foreclosure are all “not paid as agreed” accounts, and considered the same by your FICO® score. This is not to say that these may not be better options for you from a financial perspective, just that they will be considered no better or worse for your FICO score.
If you are considering bankruptcy as an alternative to foreclosure, that may have a greater impact to your FICO score. While a foreclosure is a single account that you default on, declaring bankruptcy has the opportunity to affect multiple accounts and therefore has potential to have a greater negative impact on your FICO score.
End of official answer from www.myfico.com and back to me:
What does this mean for homeowners struggling with their mortgage and considering a short sale? Not much – these are just the facts as I got them from www.myfico.com today. Anyone who claims otherwise (like a realtor improperly pitching a distressed homeowner for a short sale listing) should not be selected as a professional for hire. There are still many benefits of choosing a foreclosure alternative and solving ones problems proactively instead of going through foreclosure – but those benefits are more about things like:
- proactively solving ones problems instead of having the problem forcibly solved by the lender taking the property back in a public fashion
- possibly having a lower credit impact, due to faster loan resolution (i.e., the credit score is affected by how long an account is in delinquency so selling it via short sale with only 3 months late is better than getting foreclosed on after being 12 months late)
- leveraging the pro-consumer programs and environment of today to negotiate debt forgiveness from a subordinate lien holder (vs. having that lien holder pursue collections after foreclosure, as some have the right to do).
Final tip: Anyone thinking about a short sale on a first loan amount less than $729,750 check our the HAFA program.
