The Effect of Doing a Short Sale on Your Credit Rating

Homeowners who are having trouble with their finances and facing foreclosure often consider doing a short sale in order to avoid the foreclosure process. This is exactly the case now in the real estate market where the sub prime adjustable rate mortgage problem has created large-scale foreclosures and tremendously dragged the value of real estate down.

Doing a short sale obviously has effect your credit rating. For this reason you must know exactly how a short sale deal affects your credit. Many homeowners have decided to short-sell their properties without considering the impact of a short sale and if you wonder how a short sale affects your credit ratings most of what you need to know is that the negative effect of a short sale will be many times better than the effect of foreclosure.

Normally, a foreclosure will get your credit rating to plunge down 200 to 300 points and may take considerably longer to reestablish your credit rating once your financial troubles are worked out. A pre-foreclosure FICO score of 675 could sink to as low as 395, basically disqualifying you from future credit approvals. Not only that, it may take three years before you can qualify for another home loan.

In a short sale, expect to see some credit score damage, but not as much as the effect of foreclosure. The damage on your FICO points will be somewhere around 75-125 and it will appear on your report as a pre-foreclosure in redemption which is not as bad as the negative impact of foreclosure. While short sales can save you money in the short term, they can surely hurt you in the future in terms of credit. You will most likely be able to secure a new home loan in about a year and a half, depending on the standing of your credit payments and what the credit report shows.

The effect of short sale on your credit report entirely depends on any agreement made with your lender. You need to negotiate a deal with the bank or your lender, otherwise, the report will be considered closed and the loan was not completely paid. This can have a damaging impact on your credit rating. You need to negotiate how the short sale is going to be reported to the credit reporting authorities. You may need the services of a lawyer to help you negotiate with your lender.

Unlike the impact of foreclosure, doing a short sale can still have a considerable effect on your credit rating. The bottom line is the effect of a short sale on your credit rating is much nicer than a foreclosure and it can be even better if the way it is reported is settled with your lender. Also, do not consider going it alone. It is best to ask advice of a lawyer, your accountant or a good real estate agent who is knowledgeable with short sale deals. You may want to hire any of these professionals to have the right counsel before engaging in a short sale.

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