I get the question from people all the time: short sale or foreclosure, which is the better option? My knee-jerk reaction is always “Are you kidding? Short sale, of course!” This has been mostly because I was always under the impression that a short sale, although still a ding on your credit, was gentler on the score than a foreclosure.
But according to a recent blog post by FICO Banking Analytics, there is no real difference in the affect a short sale or a foreclosure has on your credit score. Both the impact in points and the time to fully recover is about the same for both events.
This put me in a precarious situation. All this time I had lauded the short sale as vastly superior to foreclosure, largely because of its less adverse affects on credit. So I was forced to do further research into which was the better option. In doing so I learned about benefits of a short sale I wasn’t even aware of, and found that the FICO blog was way off.
Each borrower’s credit situation is different, and the way that a creditor reports a short sale to bureaus is different. The reality is that hundreds of thousands of distressed homeowners who have chosen a short sale have experienced a lesser impact on their credit than those who have chosen foreclosure.
In a short sale, a distressed homeowner may be able to obtain another mortgage sooner than someone who has a foreclosure on his or her record. Also, more and more employers pull credit before hiring a potential employee, and a foreclosure can keep you from getting a job. Some employers pull credit reports on existing employees, and a foreclosure may not bode well in certain industries.
These benefits stacked against the negatives of foreclosure, including the embarrassment of public announcement and literally being kicked out of your home, make, in my opinion, short sale the reigning champion.
Now you make the call!