Short Sale Credit Impact
For those new to the real estate short sales, there is a mystery between selling your home as a short sale and preserving your credit rating. It’s an important and valid question.
Short Sale Basics
Short sales happen with the lender agrees to accept less than the amount owed on the mortgage because there is not enough equity to sell and pay costs of the sale. It used to be where lenders would not consider a short sale until you were late on your payments, but that has changed.
Short Sale Impact on Credit Score
Trying to predict the exact outcome of your credit score is quite difficult since your credit is affected by many variables and the FICO score is a constantly evolving process and changes over time. Also, your credit rating is composed of three different credit reporting agencies: Equifax, TransUnion and Experian.
Does a short sale affect your credit? First off, let’s compare two other alternatives to a short sale: foreclosure and bankruptcy. Based on reports and experience, a short sale is about 100 to 200 points less damaging to ones FICO score compared to a foreclosure and 200 to 250 less damaging than Bankruptcy. Short sales impact credit scores by not the actual short sale but the months of late or no payments made on your mortgage. The less number of late payments, the better your “short sale credit report”…to a degree. Not only is the FICO score reduction a factor to consider, but the length of time the credit is negatively affected.
A foreclosure will remain on a credit report for about 7 years, while a short sale will stay less. In addition, Fannie Mae has recently changed their underwriting policy for purchasing mortgages from banks. The wait time for a new loan with Fannie Mae is just 2 years but for another bank it’s 5 years after a foreclosure sale.
Typically, it will take about 18 months to 2 years before you can quality to buy a house again which is much better than the alternative of foreclosure.
Short Sale Hurt Credit
A short sale can hurt your credit score so you make sure when you negotiate with your lender on the details of the short sale, that they agree as “paid as agreed” or “paid in full” to lessen the impact on what is reported to the credit companies. A short sale where the customer walks away from the debt, will encounter credit damage.
In the end, short sales are a much better option than foreclosure or bankruptcy. Going through foreclosure will make it difficult for you to get a loan for at least 3 to 5 years, where a short sale will enable you to qualify for a new mortgage within just 2 years.
If the property owners needs to take a new loan from the bank to make up the difference the credit implications would be same as taking out a new loan. Sometimes taking out a new loan may even improve a credit rating.
Short FICO Score
Three credit events will severely ruin a FICO score and carry about the same weight:
• Serious delinquency
• Derogatory public record
• Collection filed
Renting After a Short Sale
Due to the current credit meltdown, many landlords are not harsh on those submitting credit that has foreclosure information listed. Although if there is a list of “derogs” over a broad category of obligations, then the credit report can be viewed negatively.
Of course, to avoid a short sale from hurting your FICO score, the best option is to have your lender restructure the loan. Your lender may be willing to make accommodations to avoid taking the property back or taking a greater loss.