Picking short sale after reality check on refinance – Find effect of both on credit

Refinance is the option which can help you in dealing with the problems you may have been facing, in making the mortgage payments. This helps you in saving the home from foreclosure, without hurting your credit too negatively. This is the process through which you are actually financing your home for a second time. The only difference is that, in this case, the terms and conditions are supposed to be better than that of the primary mortgage. However, not all can get their homes refinanced. In that case, you can opt for a short sale.

Difference between refinance and short sale

In order to refinance your home, you will not only be required to have a good credit score, but there should also be enough equity in your home. Therefore, if you cannot show a good credit score and if there is very less equity in your home, it may not be possible for you to obtain a refinance loan. Still, if you would want to avoid a foreclosure, the only option left for you would be short sale.

A short sale is the process in which you can sell off the home for less than what you owe to the lender. However, this would be possible only if the lender agrees to your short sale request. In this, though it becomes possible to avoid foreclosure, you would not be able to retain the home. Still, unlike foreclosure, in this case you will have the freedom to sell off the home as per your needs. The lender can no longer be the dictator.

So, when can refinance fail? Some of the most common situations under which refinance can fail are:

1. When you do not have enough credit score

2. When the refinance rates are higher than that of the interest rate of your existing mortgage

3. If there is less or no equity in your home

In case if a short sale, lenders do not always agree to the request. Still, if the lender finds out that the property is actually not worth much and that the cost of foreclosure is going to be quite high, the lender may readily agree.

Effect of refinance and short sale on your credit

Anthony Sprauve, director of public relations for myFICO.com says about refinancing your home – “It will neither help nor hurt your score in the short term,” and “Any impact will be minimal and brief. The true impact will be how you manage the new mortgage over time.” The minimal impact is going to be mainly because you will be applying for loans, in order to get the ‘re-financing’ done. When you apply for loans, the lenders pull your credit report. This is known as the hard pull and has a slight negative effect on your credit. There are many homeowners who believe that refinancing a home is going to have a hugely negative effect on your credit. However, that is what it is not. Such hard pulls stay on your credit report for 2 years. Moreover, if you apply for several loans, the effect may still be seen, with respect to your score. Applying for a single or a couple others is not going to affect you too very adversely. Furthermore, if you apply for all of the loans within a time frame of 15 days, the effect won’t be hugely negative.

As for the short sale, the effect on your credit is a highly negative one. Although, you can avoid a foreclosure through short sale, it may not be possible to avoid hurting your credit in the process. It lowers your credit score by 200 to 300 points. This makes it harder for you to buy a home on an immediate basis. You will have to try and improve your credit score first.

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About David GoldsteinDavid Goldstein is an Owner and Founding Partner of Express Schools, LLC. which operates online education providers Real Estate Express, Insurance License Express and License Tutor. Follow him on Twitter.

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