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How will a short sale, foreclosure, loan modification, deed-in-lieu affect my credit? If you stop making your mortgage payments, or miss payments, or pursue a course of action where the bank ends up taking less on the house than what you owe (short sale, foreclosure, or deed-in-lieu of foreclosure), then it is almost certain that your credit score will fall.

What you need to know

  • The quickest path to get your credit score back up to where it was
  • The difference between your credit score and your credit profile
  • Why having of your accounts with the same bank is risky
  • How long until you can buy a home again
  • How the Underwater Homeowners Assessment and Action Plan can help

Learn the answers to these questions and more here (click the tabs above).

Credit Score FAQs

  • Q: Whatâ��s the difference between a credit profile and a credit score and why does it matter? (Click to read the answer)

    A: The difference between the two is that a score is made up of things that are on your profile. But if you have a short sale versus a foreclosure and you miss six payments doing either then you�re really going to have about the same hit to your credit score either way. However, your credit profile is going to be more affected by the foreclosure because that shows up as the judgment on your profile, rather than with a short sale which shows as �Settled for less than owed.� And that is a little easier to recover from than a foreclosure judgment.

  • Q: Which is worse for my credit: a short sale or a foreclosure? (Click to read the answer)

    A: But the other thing people have to keep in mind is that in a short sale process we generally get through it a lot faster than a foreclosure. Generally a foreclosure can take longer before the banks are finally taking the home and ending the report to the credit. So that�s kind of key into how much it will affect your credit score � for how long is the bank reporting delinquent payments.

    Which is important because your credit repair � in other words-fixing your credit score, getting it back up to what it might have been prior to an event like a short sale or foreclosure � that repair work is going to begin at the end of the closure of the transaction. So if you had a foreclosure, let�s say or you had a resolved loan modification or you had a foreclosure. The date of the closure of that, that�s the day you begin getting that credit score back up.

    And it is important that if you do go through with a short sale it could take a lot less time with a short sale then it does to allow the bank to complete the foreclosure process and have everything sold and have you back in a place where then the clock is ticking for you to have a chance to purchase a home. And that�s really the main thing that your credit profile is going to affect in the future and something like a judgment of the foreclosure versus the settle for less notation on the short sale are going to impact is the time frame under which you can go out and purchase a new home.

  • Q: If I do a short sale or the bank forecloses, when can I buy a home again? (Click to read the answer)

    A: Just to keep it simple�Three years on a short sale. With a foreclosure it is going to take longer. It could take five years, or it could take seven under certain lending circumstances to get back in a place where you can get a certain type of loan to buy a property after a foreclosure. Which makes the short sale an interesting option for a lot of folks who are interested in getting back in the home market sooner than later.

  • Q: Does it matter if all of my accounts are with the same bank or credit institution? (Click to read the answer)

    A: If you have all of your accounts � credit cards, mortgage, car loans � with one lending institution, you�re probably going to want to consider opening accounts with other institutions before you stop making mortgage payments. That way we can maximize your credit profile to be able to rebuild your credit score as fast as possible on the back end. Check out Credit Score Resources (tab above) for specialists who can help you navigate all this.

  • Q: Can my credit score affect my security clearance? (Click to read the answer)

    A: Yes it can. In fact, your credit score can affect security clearances, certifications, even employment in general. So the government won�t take away your security clearance because you did a short sale per se, but they could take it away because your credit score dropped. They could take it away because of a foreclosure � because a foreclosure shows on your credit report as a judgment whereas a short sale shows as settled for less than owed. So if you have a security clearance, you need to take that into account as you make your decision.

    Even if you�re going to change jobs � whatever job you have � a lot of employers pull prospective employees� credit. These are the kinds of things that underwater or otherwise distressed homeowners really need to think about.

    So you might want to time your short sale (or whatever action you take). Generally if you have a security clearance once a year, so start the process right after they�ve pulled your credit, so you can get through the short sale as quickly as possible then go to work right away with a credit repair specialist to get your credit back up as high as you can before the employer pulls your credit again. Otherwise you could be in the worst potential place with your credit right when your employer is pulling your credit.

    For financial services professionals with securities licenses, the broker dealer will also pull the person�s credit once a year. It also matters if the short sale, for example, is the only thing on your credit, then the employer might look at it differently than if the employee defaulted on everything (which some people do since they�re dinging their credit anyway � in some cases that can make sense, but probably not when your credit score really matters for your job).

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Get expert advice on short sale credit plus foreclosure and credit. What do homeowners with an upside down house need to know. If you sell short or mortgage default, when can you buy a home again? Learn whether a short sale v. foreclosure is worse for your credit. Understand the difference between a credit score and credit profile, and learn how your credit score affects you.

Watch other videos

If you stop making your mortgage payments, or miss payments, or pursue a course of action where the bank ends up taking less on the house than what you owe (short sale, foreclosure, or deed-in-lieu of foreclosure), then it is almost certain that your credit score will fall. That doesn�t mean that one of those options isn�t right for you.

There�s a lot that goes into how best to take action given your situation (did you know, for example, that if you have credit cards with the same bank as your mortgage the bank could shut off your cards?) and how best to repair your credit. To really understand the implications of your decision on your financial health � of which your credit is just a part � you need to sit down with a professional advisor and get an Underwater Homeowners Assessment and Action Plan.

Learn more about the Underwater Homeowners Assessment and Action Plan


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