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Fair Isaac: Short Sale Won't Save Credit Rating Hit
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MTA News Service:

Stuck in a house you can't afford or can't sell for more than you owe on it?

Beware the Web, where you'll see plenty of claims that short sales will save your credit.

In a short sale, you sell the property for less than you owe the bank. In most cases, it will wreck your credit score.

"Both short sales and foreclosures are considered negative by the score because our data shows us it's very predictive of future credit risk," said Tom Quinn, Minneapolis-based Fair Isaac Corp.'s vice president of FICO scores, which are widely used by lenders.

"The claim that doing a short sale is not going to hurt your score is false. It's inaccurate."

Credit scores, designed to assess how likely it is that consumers will repay loans, look at the severity (are we talking bankruptcy or a late car payment?), frequency (have you skipped a payment once, or have you missed a bunch?) and recency (did you miss a payment last month or last year?) of items on your credit report.

In short sales and foreclosures, "you made a lender eat a big number," said Alex Stenback, a mortgage banker with Residential Mortgage Group in Wayzata, Minn.

That's not to say that there aren't some instances where short sales are better. If a borrower is current at the point of a short sale, for instance, the credit score won't sink as far as it would have if he or she hadn't made a mortgage payment for six months.

Still, Fair Isaac said the benefit from not having prior delinquencies on file pales when compared to the hit a score takes from a short sale.

Dan Williams, program director for LSS Financial Counseling Service, said this widespread notion that short sales are better for credit is a big problem because it deters some people from going into foreclosure when that would be the best option.

"If you've got a poor credit score and are doing a short sale to preserve your credit, it's ridiculous," Williams said.

If you're having mortgage trouble, seek help right away from a housing counselor or an attorney.

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Hard to see why you would go to the trouble of a short sale vs a foreclosure... at that point it should be about "how long can I stay in the house since I'm going to be screwed when it's over in either case"

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