How Does A Short Sale Impact My Credit?

“Unfortunately many homeowners are upside-down in a bad mortgage loan. And would like to short sell their house but are worried about the impact it will have on their credit scores. I’ve seen articles that say they’re not bad for your credit and I’ve seen articles that say they’re just as bad as a foreclosure.  What’s the truth?”If you’re one of the millions of Americans who opted for a short sale during the housing downturn, or you’re considering one now because your home will never be worth what you owe on it, you may be unsure about how they really impact your finances. (There is, after all, a lot of misinformation about short sales on the internet, and even from real estate professionals). Here is the truth about short sales and how they impact your credit.

Fact: A Short Sale is a Default

Let’s start by defining the difference between a short sale and a foreclosure, and what they mean to your credit. A short sale is essentially a settlement between you and the lender in which they allow you to sell the house for less than you owe, because presumably, you are facing hardship (whether you are truly unable to make payments, or are doing so because you’re “underwater” is beside the point). A deed-in-lieu of foreclosure is a voluntary process in which you “hand over” the deed to the lender to avoid foreclosure.  In a full on foreclosure, you simply stop making payments on the home, and ultimately, the bank seizes the property. While it’s true that these first two events may be a little “prettier” than the latter, they all involve defaulting on a loan agreement. They all have a negative impact on your credit score, and your future financial ability to obtain a new mortgage, and lines of credit.

A short sale is reported as a settlement on your credit reports and settlements are one of the many entries that are considered to be derogatory by credit scoring systems.

Fact: Your Credit Score May Not Know The Difference

There’s not a huge difference between a short sale and foreclosure in terms of the credit score impact. The impact to your score has more to do with where your score was to begin with and whether or not the lender is reporting a deficiency balance (the unpaid balance of a loan after the home has been sold short). Don’t believe real estate agents who try to convince you a short sale is good for your credit.  That’s simply not true.

Fact: There is No Quick Way to Restore Your Credit

If you have a short sale, you might have to wait years before you can apply for a new home loan. In a foreclosure, you’ll wait longer. In either case, how long it takes you to rebuild your credit and ultimately be approved for new loans rests on your unique financial situation. Regardless of the reasons for a short sale, it involves defaulting on a loan and you are considered high risk for some time after.  In that waiting period, all you can do is pay your bills on time, keep your balances on existing lines of credit low (ideally, using less than 10% of your available credit lines), and be patient.

Fact: A short sale incident is just as bad as a foreclosure

Notwithstanding the deficiency balance issue addressed up, a short sale and a foreclosure are equal events in the eyes of credit scoring systems. They both involved loans that were not paid as agreed and that were losses to the bank or mortgage lender. The back story is meaningless.

Short sales (those two words) are NOT reported to the credit reporting agencies. This has led some to suggest that they have no impact on your credit. That’s very deceiving. Short sales are reported as settlements to credit reports because that’s the disposition of the loan. So, it’s true that you won’t see the words “Short” and “Sale” on a credit report but you will see the word “Settlement” as a result of a short sale.

If you or someone you know needs help with their credit reports in Indianapolis” contact us for a free review today. We are Indianapolis’s only Full Service Credit Consulting Company, InCreditable Advisors, please visit us at www.creditindy.com or give us a call at 317.202.1297 to schedule your appointment today.