Home Foreclosure vs. Pre-Foreclosure Short Sale: How will You be Affected

Homeowners in danger of a foreclosure may wonder if a pre-foreclosure short sale is a better way to go. A short sale takes place before foreclosure where the lender agrees to accept less than what is owned on the mortgage. One of the major issues to consider when determining if a mortgage foreclosure or a short sale is best for you is the affect on your credit scores and your ability to buy a new home in the future.

What's the difference between a foreclosure and a pre-foreclosure short sale?

While the mortgage foreclosure process may give you more time in your home before you have to move, home foreclosures affect your credit scores drastically. Industry experts state that a mortgage foreclosure or a deed-in-lieu of foreclosure can drop a consumer's credit scores between 250-280 points. A short sale will still show on your credit; however, it will show as "a pre-foreclosure in redemption status" and the affect on your scores will be between 80-100 points.

How Soon Can You Buy a New Home after a Home Foreclosure?

The difference between a home foreclosure and a pre-foreclosure short sale will also affect how soon you can qualify for a new mortgage loan. On the average, borrowers looking for a new mortgage after a foreclosure will need to wait approximately three years before looking at a decent interest rate offered by a mortgage lender. Pre-foreclosure short sale borrowers should find the ability to get a decent mortgage in half the time of a homeowner who has gone through a mortgage foreclosure.

Another issue of pre-foreclosure short sales, determined by the state you live in, is that some states allow the lender to take action against you in court to recover the difference in what the home sold for and what you owed. This can include legal fees. Remember, if you are facing a possible mortgage foreclosure talk to an attorney or a lending professional who can guide you through the process of a pre-foreclosure short sale as easily as possible or determine if a home foreclosure is right for you.

By Sheryl Landrum
Mortgage Credit Problems Columnist