How Does A Short Sale Affect Credit?

Short sales are no doubt a viable way to stop foreclosure

, but the credit effects have made many homeowners think twice. Is it really worth going through the short sale process when you dont get to keep your home? What credit short sale effects should you take into account? This guide answers some of the most common questions on credit short sale and how they can affect you.

Foreclosures and your credit

A short sale does have a negative effect on your credit, but its far less damaging than a foreclosure. In general, a credit short sale reduces your rating by 100 to 200 points, while a foreclosure brings it down by a hefty 300 or more. Thats not to mention the amount of time it takes to clear: a good 10 years for a foreclosure compared to just 5 to 7 years with a credit short sale. So while you dont get to stay in your home, youre still better off with a credit short sale than letting the bank foreclose.

Short sales and defaults

Often, the drop in credit scores following a short sale comes from the missed payments rather than the sale itself. Many lenders will only accept a credit short sale when the mortgage is 60 days or more behind, by which time the score will already have dropped significantly. If you can negotiate a credit short sale with your buyer without being in default, you can greatly reduce the impact of the short sale on your credit score.

How short sales are reported

Another thing that affects credit short sale impact is how your bank reports the short sale. Many will report it as a pre-foreclosure in redemption, meaning you were at risk of foreclosure but were able to prevent it. Others will consider it forgiven debt (which it technically is), which is viewed more negatively by the credit bureaus. If youre working with a credit short sale attorney, you may be able to negotiate with your bank so that the sale is not reported in a negative light.

Buying a new home

Most people are concerned about credit short sale impact because they plan on buying new homes afterwards. The good news is that the wait time for a credit short sale is much shorter than that of a foreclosureabout two years compared to five or more. If you were not in default more than 60 days before the credit short sale, you may even be able to get a mortgage immediately after closing.

by: Jacob Bon

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