Are Foreclosure, Short Sale and Short Pay-Off Different?

How Short Sale and Foreclosure Affect Your Credit Score

It's no surprise that in this economy both banks and individuals are being confronted with hard times. Due to this instability, banks are becoming stricter and trying to find ways to compensate for lost revenue. According to Michael C. Gray, a CPA in California, this includes increasing interest rates and converting amortization of principal for interest only loans. Because of this, many homeowners are falling too far behind and have to make the choice of whether to "walk away" and allow foreclosure or to try sell.

If a foreclosure or short sale is filed there are two important things to know about how it will affect your credit report. Both short sale and foreclosure are derogatory items that will remain on your credit report for seven years. The main difference is that if a home is foreclosed on it will report as "foreclosed" whereas a short sale, or negotiating a short pay-off refinance may read "settled" or "charge off" thus carrying a lighter penalty to the credit score. Due to new Fannie Mae rules wording may be crucial. The automated underwriting system may see the word "foreclosure" and automatically reject a loan.

Finally, short sales, foreclosures and short pay-off are treated differently when it comes to Borrower's FHA insurance eligibility:
. Short pay-offs obtained while the borrower is current with his mortgage payments are eligible for regular FHA insurance.
. Short sales may or may not be eligible for FHA insurance for up to 3 years after the sale.
. Foreclosures cases are more difficult, and are assessed on a case by case basis.

For more information, call John Palla at 312-373-0750.