Short Sale And Deed In Lieu Of Foreclosure Plans–Do Foreclosure Alternatives Influence A Homeowner’s Credit Score?

Homeowners who are struggling under the weight of their home loan have often found that there may be foreclosure alternative options to short sales that will help them unload their property when financial distress has made meeting their home loan payments too difficult, but depending on the factors that are the cause of their financial difficulties, these individuals may be in a position to avoid a formal foreclosure. There many homeowners who are seeing short sales as a viable option to foreclosure as those who are facing problems like unemployment or other financial distress may have been able to keep their home if these unforeseen events had not arisen.

However, there are questions as to whether short sales are beneficial in terms of helping homeowners avoid damage to their credit score since many view an outright foreclosure as a more detrimental hit to their personal financial life, as opposed to short selling their property due to problems related to their home loan. The issue of a homeowner’s credit score has recently been explored when it comes to short sales and foreclosures, and some homeowners may want to review their options for foreclosure prevention and affordability before considering either short selling their home or resigning themselves to foreclosure.

A recent article on HousingWire.com stated that homeowners who short sold their home saw a similar decrease in their FICO score over time as homeowners who face foreclosure. It was stated that,FICO said homeowners with short-sales and foreclosures on their records ended up with similar credit scores, assuming their scores were similar as distressed homeowners.” Obviously, this has begged the question as to whether short sales are even helpful for homeowners who may face foreclosure, as many are attempting to get out of their mortgage obligations before a foreclosure is their only option.

Also, this report stated that homeowners may face a similar period of credit restoration, as there are factors that homeowners cannot escape when either a foreclosure may be inevitable or a short sale may be an option.  However, there are some who wonder whether a creditor or future lender may look more favorably on a homeowner who participates in a short sale rather than resigning themselves to foreclosure.

Essentially, homeowners who usually qualify for a short sale option are those who have attempted to avoid foreclosure through either a modification or other home loan assistance opportunity, but due to financial distress that has caused unforeseen setbacks, homeowners may simply then be left with a short sale as their only alternative to foreclosure. Yet, lenders who may see that homeowners have tried to avoid the loss of their home and were not responsible for their financial distress and inability to make their mortgage payments may be less severe on borrowers, as unemployment and simply borrowing beyond one means to repay our two entirely different situations that consumers may face.  However, consequences are inevitable for homeowners no matter the route they choose, it’s only the severity that may be in question by some.

Yet, when it comes to short sales and foreclosure prevention, these options will influence each homeowner’s score differently, so homeowners may need to explore not only federal options, like home loan modifications, but state-specific plans available from state housing agencies.  Since homeowners may be in a worse financial position no matter if they face foreclosure or a short sale, exhausting foreclosure prevention options may be more beneficial on a credit score, rather than seeking out a short sale on a home.