Many people worry about foreclosure and its effects on their credit scores.  As a result, they try a short sale of their home in an attempt to minimize the damage.  Unfortunately, this is a myth. There is no real difference as to a short sale, deed in lieu of foreclosure, settled account, or a foreclosure, when it comes to your score.

This is because, according to the Fair Isaac Company (FICO), which generates the scores, credit bureau reports are limited in how they represent foreclosures today, so it's generally not possible to tell from the credit report how the loan was resolved, only that the borrower did not meet his or her obligations under the terms of the mortgage loan.

Know More About How a Short Sale Affects Your Credit

How a short sale affects your score can also be a function of when it happens and whether you have other credit problems going on. Ask yourself these questions:

  • Were you current with payments at the time, or were you a few months behind?
  • Had foreclosure already started?
  • Are you behind on other debts?

How your credit scores are affected is not simple and can vary greatly from person to person.

So What Do I Do?

The only advantage of a short sale is that it resolves the situation with the mortgage company on your timetable, and allows for an orderly exit from the property. But if this debt is not the only one, and you are weighed down by other creditors, you may need a solution to a bigger problem. You might want to look into bankruptcy.

Not sure if that is right for you? Then download my free book, Am I In Too Deep? A Guide to Knowing When You Need to File Bankruptcy in New Jersey to find out.

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Steven J. Richardson
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Bankruptcy, Collections, Student Loan, DUI and Traffic Court attorney in Woodbury, NJ.