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What kind of affect does a short sale have on your FICO credit score? Is it better than having your home foreclosed? What should I expect if I’m going to short sell my house?
What is a Short Sale?
If you are getting behind on your mortgage payments, you may be facing foreclosure very soon. To avoid foreclosure, and the subsequent negative impact on your credit score, you may be considering a short sale instead of a foreclosure.
A short sale occurs when the proceeds of a real estate sale fall short of the balance owed on the property. In a short sale, the bank or mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the mortgagor.
Most Short Sales leave a deficiency balance for which the Mortgagor / Borrower is still liable. In 99% of all cases it is not a settlement-in-full. Meaning, that the homeowner will still owe money on their former home or mortgage.
So if you can’t afford to make your loan payments, and are looking for a way to clean the slate, a short sale is not it. A short sale is recommended over a foreclosure, even though you will have a balance remaining, simply because a foreclosure is so bad for your credit score and future financial health.
What Affect Does A Short Sale Have On Your Credit?
A short sale does adversely affect a person’s credit report, though the negative impact is typically less than a foreclosure. Short sales are a type of settlement.
Like all entries except for bankruptcy, short sales remain on a credit report for seven years. Depending upon other credit information it is typically possible to obtain another mortgage 1-3 years after a short sale.
For the home owner, a short sale has the advantages that include avoidance of having a foreclosure on their credit history and the partial control of the monetary deficiency. Additionally, a short sale is typically faster and less expensive than a foreclosure.
In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount.
So Foreclosure or Short Sale?
The best situation for a homeowner who owes more than their home is worth is to look to restructure their mortgage. This will allow you to stay in your home, and avoid the huge 7 year hit to your credit history that a bankrupcty or short sale will cause.
For more information on how to restructure your mortgage, contact your bank, and read the rest of the resources on this site.
