If you are currently having issues making your monthly payments you may have thought about just letting your property go into foreclosure. Before you even think about this it is important to realize that there are other solutions to avoid the devastating affects of this event such as a short sale. A short sale has become all to common in today’s society due to the collapse of the housing market. Because homes are not worth nearly as much as they were just a few years ago, many homeowners are left with no choice but to try and sell their property for less than what is owed on the mortgage.

In the current economy and real estate market many people often wonder about the differences between short sales and foreclosures. In this article we will explain the common differences between these two events.

Selling your home as a short sale while not ideal, is a much better alternative than going the foreclosure route. These are actually a sort of win win situation for the banks and homeowners. The bank will generally still obtain a good portion of the mortgage from the sell while the homeowners gets to avoid the devastating affects that come along with foreclosure.

If you are thinking of letting your home go here are a few reasons why you might want to consider trying to sell your property first.

When you look to purchase another home in the near future you will have a much easier time doing so after a short sale. If your payments where never more than thirty days late and the lender does not require you to pay back the loan then you may be eligible to buy another home immediately. If your payments are in arrears when the sale closes you will probably not be able buy a new home for at least the next two years.

However, if you were looking to buy a new home after your home has been foreclosed on you will generally have to wait 7 years. With certain restrictions you may be able to purchase one after 5 years, but the general time period is going to be 7 years.

Both of these events will have different affects on your credit rating as well. A short sale is not necessarily viewed in a negative way and usually does not create a huge ding on your credit score. Typically people who sell their home as a short sale will see their credit score drop anywhere from 30–130 points and will usually be referred to as settled, paid as agreed, or paid in less than full on your credit report. It is also important to be aware that the negative marks will mainly only be caused by late payments prior to closing. For individuals who are able to manage their monthly payments all the way up to the time of closing their scores may drop as little as 30-50 points.

The affects on your credit caused by foreclosures are far greater and much more damaging to your credit. Point drops due to a foreclosure can range anywhere from 200-400 points. Not only is that point deduction severely damaging they can remain on your record for 7-10 years. This will decrease your chances of obtaining a new loan for many years.

There are several other affects of foreclosures that are not associated with short sales. For instance loan applications will not ask about short sales but will certainly ask if you have recently had a foreclosure. If you have had one then you are much less likely to receive the loan. Also, foreclosures will show up on your credit score as mentioned above while short sales will not. The foreclosure will be listed clearly on your credit report while the negative effects of selling your home will be in the form of late payments on your credit history.

As you can see both of these events are not the best options to protect your credit and should be avoided at all costs. It would be very wise to first exhaust all other options such as a loan modification or repayment plan before going either of these routes. However, for many individuals it is just impossible to manage their mortgage payments even with a lower payment, and therefore they will have to decide which route to choose.

Moe Bedard
My name is Maurice "Moe" Bedard. I am the founder of America's #1 Mortgage Forum, LoanSafe.org. My online work has been featured in the New York Times, LA Times, Fox Business, and many other media publications.