How Does a Short Sale Impact Your Credit

One of the primary benefits of a successful Short Sale is avoiding the credit damage of a foreclosure. The damage to your credit done by a foreclosure lives on for years – at least seven years.  With a short sale, your credit will recover much quicker from the credit dings of a few late mortgage payments, if you keep your other accounts current. So, consider allocating your funds to meet basic necessities (food, utilities, household needs, auto expenses and such) first. Beyond paying for necessities plan to pay other bills to keep as many accounts as possible current.

A short sale will blow a hole in your credit score, dropping it as much as 100-150 points, depending on where you started. The higher your credit score, the more you will fall.

The specific amount your score drops will on your credit history and the number of missed payments you have.

Credit scores typically range from 300 to 850. If your score is in the 750-800 range, it could drop approximately 150 points in a short sale. If you have an average or even good credit score (something in the 650-720 range), you could expect to lose approximately 100 points after a short sale.

How to Rebound from a Short Sale

Though foreclosures and short sales can both severely damage a credit score, continuing to make mortgage payments until a short sale closes might offer a path to an early rebound. In many cases, you’ll be able to obtain a mortgage for a new home in two years, and even less time if you continued paying the mortgage until your house sold, as opposed to five to seven years after a foreclosure.

Short sales, like foreclosures, can remain on your credit report for as long as seven years. The silver lining with short sales is that your score is likely to begin improving much more quickly. But there are things you can do to speed the process.

The most important step is focusing on your credit. Keep your credit card balances low and, always pay your bills on time. If you have credit card debt, try to pay it down, since it accounts for 30% of you credit score. If you don’t have revolving consumer credit, try to open an account. Many lenders will issue a secured credit card, allowing you to make a deposit to secure your card against the purchases you make. Paying statements on time will enhance your creditworthiness.

If there is on-time repayment information reported on your accounts, that is a positive and will help offset the negative caused by a short sale.

Buying A Home After A Short Sale

Many people worry about one thing when they lose a house in a short sale: How long will it take before I can buy another? Unfortunately, there isn’t one answer that fits all. This will depend on  your situation and what type of loan you are applying for.  You can learn more about Buying After A Short Sale Here.

Short Sale vs. Foreclosure on Credit

If short sales and foreclosures each had exactly the same impact on your finances, most people would not bother with a short sale.  But there are differences, with one of the biggest being the potential impact on your credit score.

Think of a short sale as a negotiated exit from a mortgage, while a foreclosure is more like surrender. A foreclosure means you stopped making payments and the lender had to go through the court system to get the house back and recover some of the debt. With a short sale, you work together with the lender to sell the property and settle the mortgage for less than the full amount due.

A short sale will show as a closed account that was “settled for less than the full amount due”.  A foreclosure will report as a foreclosure and will report a 2nd public record on your credit report.

“With a short sale, at least you are repaying a portion of the mortgage. A short sale is slightly less bad than a foreclosure and a foreclosure is slightly less bad than bankruptcy.” Rod Griffin, Director of Public Education for Experian.

Letting your loan go into foreclosure means you stopped paying your mortgage. That could degrade your credit score faster than if you continued paying until the home was sold at a loss. Lenders have a legal right to pursue you for the unpaid balance, and their legal actions can further damage your credit. A foreclosure also typically takes much longer, which results in additional missed payments reported on your credit.

Like most financial decisions, whether to allow foreclosure or sell short requires you to weigh out all of the options to decide which is going to be the best option for your situation.