What Impact Does Your Credit Rating Have On A Short Sale?

Lenders dont like it when a debtor does not satisfy their promise of repayment

, and they're quick to keep each other informed of who does and doesnt pay by reporting to credit bureaus. A report filed against an individual for non-payment of a loan will be available to any financial institution that is considering offering a loan, which means that they might decide against lending the money out of fear of not being repaid.

Although a short sale may not be considered as severe as a foreclosure, there are still credit rating implications incurred. Further points are incurred if the seller was delinquent on their loan before the sale and by how much. It's possible that a negative impact on a credit rating can be prevented all together on a short sale since in some cases, the debtor is in a position to take out another loan to cover the outstanding amount. If the reason for the short sale is that the house owner can no longer afford to repay the loan, however, then it's highly unlikely that such a loan would be granted.

A lender could even sue the person for the outstanding amount but in the case of delinquency, the borrower would not be in a position to pay. In this case the lender is more likely to make use of this loss as a tax write off. This will still be registered as revenue though, which means that the borrower could find themselves with a tax bill. If a seller of a short sale home does agree to recoup the outstanding amount then this could even increase their credit rating, again despite the fact that this is unlikely to happen in the case of a person who cannot repay the original loan.

If a seller was current on their loan when short selling their property, and they agreed to repay the debt relief, then the seller could apply for a new house right away if they wish to do so. It is not the fact that they short sold their home that the lenders dont like, it's simply down to the issue of payment.

There is still a benefit even for the individuals who do have delinquencies on their loan before a short sale to deciding upon a short sale over a foreclosure because after a short sale, the seller could purchase another house after 2 years as opposed to 5-7 years for a foreclosure.

However, at the end of the day, the decision on whether or not a loan is granted depends on how confident the lender is that they will be paid back. Due to this a borrower might need to agree to a higher interest rate if the lender considers them to be a higher risk, although the regulations of this are at present stricter since it was a factor that contributed to the sub-prime loan crisis. What's likely though is that considering the latest financial crisis and the fact that so many individuals lost an income, and with it the ability to pay through no fault of their own, then the lender may not look down on this as much as they would if it happened in a healthy economy.

by: Cory Boatright

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