Buying A Home Credit Score How Credit Works Short Sale

How Do Short Sales Affect My Credit Scores?

Written by John Ulzheimer

The last several years have been a struggle for many homeowners who find themselves in the uncomfortable position of being upside-down on their mortgage loan. Many of those homeowners, however, have been able to dispose of their homes via what’s referred to as a short sale.

Short sales occur when the lender accepts less than the full balance of the loan and considers it to now have a zero balance.

In order for a short sale to take place, the homeowner must negotiate a settlement with their lender allowing for the home to be sold for less than the balance on the mortgage loan.

There’s a great deal of confusion regarding short sales especially as it pertains to the subject of credit reporting. And while it is true that a short sale will end up on your credit reports, the impact of the short sale can vary.

Why choose a short sale?

Homeowners who find themselves in the unpleasant and stressful situation of being “underwater” on their home are smart to consider the short sale options.

If, for example, a homeowner owes $175,000 on the mortgage but the home will only appraise for $130,000 then selling the home for the amount owed is nearly impossible.

However, if the lender would agree to a short sale then the homeowner would be permitted to sell the home for the $130,000 and walk away free and clear of the $45,000 difference, which is formally referred to as a deficiency balance. You’ve made a wise financial decision.

The downside of a short sale

While short sales can unburden homeowners who are currently underwater on their mortgages, they can also have a negative impact on credit reports and credit scores.

Short sales show up on credit reports as settlements and settlements are considered to be derogatory events. The credit report entry will remain for up to seven years, which means the damage to your credit scores could be lengthy.

There’s really no difference in the impact to your credit scores between a short sale and a foreclosure. Both indicate a non-performing loan, which is why credit scoring systems treat them as equal negative events. Having said that, short sales are definitely a better way to get out of a bad mortgage.

If you’ve got a foreclosure on your credit report you may have to wait as long as seven years in order to be able to qualify for a new conventional mortgage loan. If you chose a short sale instead then you may have to only wait two years. That’s not a credit scoring variance but more so a difference in lender’s policies regarding the two mortgage events.

Short sales are also normally better for your property value, which in turn is better for the value of your neighbor’s homes.

Typically people who are trying to short sell their house will continue to do the things necessary to keep the house marketable. They’re still doing things like mowing their lawn and performing basic maintenance and upkeep, which will help to maintain the home’s value.

If you do go through a short sale there’s one final piece of invaluable advice, which is to make sure the lender is reporting it correctly to the credit reporting agencies.

Mortgage lenders are supposed to report short sales using a code the clearly identifies that the item was settled. And while the industry does a pretty good job of getting it right, mistakes do happen. About 90 days after your short sale closes make sure to pull your credit reports at to make sure the reporting is accurate.

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John Ulzheimer


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