Selling Up: How Does a Short Sale Affect Your Credit Score?
Posted By: Carlie McKeon | July 30, 2014 | 0 Comment(s)
Selling a home for less than the outstanding balance of the loan is considered to be a short sale. In such a case, the lender typically stands to lose a lot of money on the unpaid debt. Homeowners who are considering a short sale may wonder if a short sale will harm their credit in any way.
The Basics of the Short Sale Process
An alternative to foreclosure when a borrower is far behind on their mortgage payments, a short sale involves the lender agreeing to accept an amount less than what is still owed against the property. as the equity is not sufficient to cover all the costs associated with the sale. Not all lenders will necessarily agree to a short sale, which is why it’s helpful to have a seasoned realtor assist in negotiating with the lender to work something out.
The Impact of Shorts Sales on Credit Scores
Rather than showing up as a “short sale” on a credit report, it will instead appear as “paid” or “settled,” depending on what becomes of the negotiations between the borrower and lender. It’s quite rare for lenders to agree to have the short sale reported as “paid,” which would have no negative effect on a credit score. More often, the outcome of a short sale will appear on a borrower’s credit reports as “settled,” which means that the lender has agreed to settle on a portion of the repayment of the outstanding loan balance. Such an unpaid loan amount will inevitably affect a borrower’s credit rating. In fact, short sales can have as much of an impact on a borrower’s credit score as a foreclosure, according to FICO. Credit ratings can drop by as much as 85 to 160 points after the occurrence of a
Why Credit Scores Matter for Future Purchases
The impact of a short sale on a credit score can have significant effects on a borrower’s purchasing ability in the future. While those with excellent credit scores (760 and up) can take advantage of lower interest rates on any loan or line of credit, those with a poor score (lower than 660) will ultimately be charged higher rates, making paying off loans much more challenging. The more a credit score deteriorates, the higher the interest rate will be. A borrower with a credit score at or below the 660 point level will typically be required to pay at least two percentage points more in interest than a borrower with a healthy credit score.
Credit Repair is Crucial for Financial Recovery
Improving your credit score is essential for getting out of debt and bailing yourself out of financial distress. To do this, it’s important to always stay on top of debt payments (mortgage payments, credit card loans, car leases, etc). If you don’t already have a credit card, getting one can actually help you improve your credit score. Making frequent small purchases and paying them off in full and on time every month can have a strong impact on your credit score. Paying off all other loans in full every month will also help slowly improve your credit rating.
If you’re having trouble making your mortgage payments every month, and are leaning toward a short sale, it’s crucial to speak with a licensed real estate agent before making any decisions. A realtor can help you discuss your options, and help you determine whether or not a short sale is right for you. In the event that a short sale is inevitable, it’s also a good idea to talk to a credit repair professional who can help guide you through the credit repair process after the short sale.