Hi Katherin, from a credit perspective, a Short Sale is in fact more advantageous.
Here's what I'm hearing from a credit scoring specialist who has been in the biz close to two decades: going into a short sale gives you more opportunities to minimize the affect on your score. In addition, your ability to have your score bounce back is better with a short sale. Why?
Immediate affect â€“
a.) With a short sale, you may be able to keep payments current (avoiding the derogatory scoring there), and you can negotiate with the lender as to how it is reported to the bureaus. For example, if the bank reports the account paid and closed, youâ€™re better off than if itâ€™s reported as being settled for less than owed. That may be a bit of a long shot, but the point is you have some negotiating range.
b.) Foreclosures go on to public record, where short sales do not (just your credit report).
Bouncing back -
a.) Credit bureaus put short sales in a different scoring bucket than foreclosures when generating a score. The foreclosure bucket is dealt with more severely in that it takes longer to recoup the points lost by the event.
b.) Besides the scoring by the credit bureaus, lenders (read Fannie & Freddie) allow a return to the best rate pricing sooner with a short sale (2 years) than with a foreclosure (5 years)
Other Considerations -
1.) Credit scores hit in a range of 80-200 points from best case to worst case with short sales. Figure itâ€™s closer to 200 points with a foreclosure. This is consistent with other articles Iâ€™ve seen.
2.) Beware of the Promissory Note that stays on. In some circumstances, a bank will agree to a short sale if the Seller agrees to sign an unsecured promissory note for some additional amount. This obviously would allow for the lender to recoup some of its lost money after the short sale. However, if the burden of that debt leads the Borrower into bankruptcy, then the Borrower has the worst of all worlds. That is, there is a BK as well as a foreclosure on the credit report. Thatâ€™s one more public record; it lasts for 10 years, hurts score additionally, and makes it harder to bounce back.
Best Regards, Steve