The Short Sale and Your Credit Score — How One Affects the Other

Published by julia | Filed under Buyer / Seller Tips, Listings, Miscellaneous, Real Estate, Shout Outs

A short sale is one of several methods you can use to avoid getting a foreclosure on your credit report. It’s not the perfect solution to a foreclosure crisis, but sometimes it’s the best option. If you can’t sell the house at the price you need (usually equal to the amount you still owe on the mortgage), a short sale can sometimes make a sale go through, if you have an interested buyer. Opting for a short sale is advantageous in that it’s usually quick, easy, and you can avoid a long, drawn-out foreclosure procedure. It also allows you to pay off your loan for less than you owe. However, a short sale will affect your credit score, though not as badly as a foreclosure would. Here’s what to keep in mind.

FIrst of all, you’ve got to get your mortgage company to agree to do a short sale in the first place. Most of them will if it’s clear that you can’t pay your mortgage and that the house is no longer worth what you paid for it. If your lender agrees to the sale, you’ll be absolved of any remaining mortgage balance. Be aware that you’ll need to have some clear proof for your lender that making your house payments is out of the question for you financially, and that the lender will probably wait until a foreclosure seems inevitable before agreeing to the short sale. By that time, you’ll have some late payments on your credit report, which is bad, but not catastrophic.

You may possibly be held liable for the difference in tax on the original sale of the house and the amount of tax on the short sale, but this is not always the case. If a lender is willing to work out a short sale, the lender will usually be willing to work on the tax situation, as well. While a short sale can lower your credit score by around 80 to 100 points, that’s FAR better than the 200 to 300 points a foreclosure will lower it…..and a foreclosure is on your credit report for a minimum of 7 to 10 years!

Also, when your house gets foreclosed on, you’ll typically have to wait at least 3 years before you can buy a house at favorable interest rates again. If you choose a short sale, that waiting period is reduced to only about 18 months, which is a lot better. So, if you’re considering doing a short sale to avoid foreclosure, it can help you get rid of excess debt and allow you to get into a new house again much sooner than if you get foreclosed on. Therefore, it’s an excellent option to consider for those who qualify.