Unfortunately, how a short sale will affect your credit score is not completely known only because the credit reporting bureaus do not release the formulas as to how they calculate your credit scores. Conventional wisdom from multiple sources, including Business Week, CNBC and Mortgagefit.com, suggest a properly negotiated short sale will have an 80 to 100 point negative effect on the borrower's credit score. The same sources estimate a foreclosure to have up to a 250 point negative effect on the borrower's credit score.
What is known for sure is that most lenders will not finance a borrower that has had a recent foreclosure until five years have passed, while a borrower that has completed a short sale only has to wait for two years. This is because a vast number of lenders sell their loans on the secondary market to FannieMae Mae (click here for FNMA guidelines) and these are the guidelines that the lenders must follow.
What is also known for sure is that if the individual negotiating the short sale on behalf of the borrower does not get the deficiency judgment waived, this could be reported on the borrower's credit and have additional damaging effects. Add to that, the deficiency judgment could be turned over to a collection company that reports to the credit reporting bureaus, adding additional negative effects to the borrower's credit. In all, it is not only important to do a short sale versus a foreclosure, it is almost equally important to have the short sale negotiated correctly.
Should you have any questions regarding how the legal or tax consequences will affect your personal situation, we recommend that you consult with an attorney or tax/financial advisor that is familiar with your personal details.
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