Are you considering a short sale of your house? If so, you’re probably wondering how will a short sale affect your credit score.
In this guide, we’ll dive in and help you understand the impact a short sale has on your credit.
Let’s jump in…
What is a Short Sale?
First, let’s quickly go over what a short sale is.
A short sale occurs when a homeowner is unable to pay his mortgage and obtains permission from his lender to sell the home for less than what he owes on it.
The sale process is similar to a standard home sale – you hire a real estate agent, you fix up your home, and you wait for offers. The biggest difference is that your lender needs to approve the offer before you can sell my house Fast Miami.
Once the house is sold, the lender receives the cash and the remaining balances on your mortgage are forgiven. Some states allow the lender to seek compensation for the amount of money not covered, but it’s rare that they actually do so.
A short sale is one of several strategies used by homeowners when they are unable to continue their mortgage payments but would prefer to avoid going into foreclosure.
While a short sale does affect the homeowner’s credit, as it can remain on your credit report for up to seven years, it’s generally considered a better alternative than going into foreclosure.
Why Banks Consider Short Sales?
When a homeowner negotiates a short sale, he indicates that he isn’t going to simply walk away from his responsibility, and is actually willing to take steps towards repaying the lender.
The vast majority of homeowners who go through a short sale are behind on payments first. In fact, most lenders won’t even consider a short sale an option until you’ve missed several mortgage payments.
If you lost your job or are facing some type of financial hardship you can contact your lender BEFORE you fall behind on payments.
Lenders don’t want to be landlords. They would much rather have their money work for them, and if they don’t have to deal with selling a physical property, or filing paperwork for a foreclosure, the better.
Which is why lenders usually agree to a short sale since going through a foreclosure is too expensive or too much of trouble to do.
(If you’re interested in the full process we’ve written a detailed guide on the short sale process you can read.
Is a Short Sale Better Than a Foreclosure on Your Credit?
In short, yes.
Conventional wisdom says that a short sale will have a lesser negative impact on your credit score than a foreclosure. While true in theory, in practice the actual impact of a short sale has on your credit depends on the specific circumstances that lead to it, your credit score at the time, and how the lender reports on your credit after the sale.
The credit reporting agencies don’t care what is reported, they just report what is given to them. It’s your future lenders that care and look at what they see on your report if you want to get a loan again in the future.
Putting it simply, a short sale is a form of out of court settlement.
According to Experian, the term “short sale” does not appear in a credit report. When you negotiate a short sale, the lender is agreeing to accept less than the full amount owed on the mortgage, and will likely report the account as settled for less than the full balance.
Which is Worse Short Sale or Foreclosure?
A lender would look at a short sale on your report better than they would a foreclosure.
A foreclosure on your credit report is typically looked at by lenders as very negative. It may not be as bad as bankruptcy, but not paying your mortgage and losing your house is worse than settling.
A foreclosure on your credit report will make it very difficult to obtain new credit at the best rates, especially if you also have problems with other credit accounts on top of it.
Both a short sale and a foreclosure remain on your credit report seven years, but a settled will look better in the eyes of your future lenders.
How Does a Short Sale Affect Your Credit With No Late Payments?
If you were late on your payments going up to the short sale, the late payments will remain on your report for up to seven years from the original delinquency date of the mortgage. So often it’s better to not fall behind on payments in the first place.
If you complete a short sale before falling behind on payments, your account status should show that it was never late, but that the debt was settled and not paid in full. This “settled” status will still result in a negative impact on your credit scores but the impact depends on your past credit history as well.
If your mortgage is your only issue, and you have no other late or payments behind on credit cards and other items, it will lessen the impact credit scores less than if you have other issues, such as late payments or high balances on other accounts.
How Long Does a Short Sale Affect Your Credit?
The short sale will appear in your credit report for up to seven years, but it doesn’t mean you won’t be able to buy a home during that time or improve your credit.
Since credit institutions pay close attention to the last 24 months of your credit record, you probably won’t be able to get a mortgage in the first couple of years. Even if you’re not buying a home, you will have higher interests in every other kind of loan you obtain, including credit cards and business lines of credit.
Every time you miss a mortgage payment your credit score will take a hit. Even if you miss a single mortgage payment, your credit score could take a significant hit. The more mortgage payments you miss, the worse your credit score will get.
If you feel you will start missing payments or have already missed one, you can contact your lender and let them know you are going through financial hardship to start going through your options which can help keep your lender from reporting late payments to the credit bureaus.
Getting Help From Professionals
If you do proceed with a short sale, you may be able to ask your lender to agree to report your short sale as “paid”. This represents the best possible scenario because you would avoid any negative effect on your credit score.
Successfully getting a lender to agree to a short sale and agree to “paid” status can require skilled levels of negotiation, a compelling and bulletproof letter of hardship (which explains at length why you the borrower is unable to continue your payments), and many other documents to even stand a chance.
That’s why we typically recommend working with a professional who has the experience to negotiate on your behalf and buy your house.
Short Sale Consequences
While it’s true that in most cases a short sale would be less damaging to your credit score than a foreclosure, most folks who go through a short sale already have a damaged credit score, and the process damages it even more.
A short sale should never be your first option if you find yourself unable to pay your mortgage. Always talk to your lender first to find out your options.
If your back is against the wall, and your only options are a foreclosure or short sale, then a short sale is the better way to go.
How Do You Remove a Short Sale From Your Credit Report?
The good news is that no matter how bad your credit score is, there’s always a way to get back on your economic feet.
The first thing to do is to stop your credit score from dropping any further. You need to make sure that there aren’t any other unpaid debts you’re not aware of, such as credit cards, medical collections, car payments, etc.
Next, you need to rebuild your credit trustworthiness. If you have any credit cards or lines of credit open, don’t close them. Continue making payments on time, and keep your debt low.
Once you have a good payment schedule going, you can try to open different kinds of credit accounts. By keeping a good mix of credit accounts, and paying them on time, your score will start to recover.
Dispute a Short Sale on Your Credit Report
As you keep working at fixing your credit score, eventually you’ll be able to apply for a mortgage again at a more reasonable rate and you may even be able to dispute the short sale.
We won’t dive into disputing items on your credit report but you can find more resources here from Experian.
Either way, after seven years, your short sale won’t show up on your credit score anymore.
As they say, time heals all wounds, time can also reduce the impact on your credit score. In time, the negative impact on your credit scores will decrease. However, it will likely have at least some negative impact on your credit scores as long as it remains on your credit report.
Want Help Navigating the Short Sale to Ensure the Best Option?
If you are considering a short sale, contact us to learn how to best approach your lender. We have helped homeowners get out the foreclosure and complete the short sale process with minimal effects on their credit. Give us a call or complete our short form to have us help you get out of this tough situation.