Are You Aware What Happens to Your Credit Rating If You Short Sell?

Sometimes, like many people, you are not aware what happens to your credit score or rating if you have to short sell. Therefore, if you are considering this option, you must first get your mortgage lender to agree to accept the sale, which would be accepting less money than the amount that you owe on the mortgage loan. These kinds of sales became more and more common as the real estate crisis worsened, but it is still not an easy thing to accomplish.

The idea behind doing a short sale of the property is to avoid having a foreclosure reported to the CRAs, which is far more damaging to your credit score and takes longer to fix. In addition, a short sale is generally done more quickly and the costs are less than a foreclosure. Lenders are sometimes willing to agree to short sell a property to avoid the time and expense of a foreclosure.

In any event, a short sale will probably lower your credit or FICO score anywhere from 75 to 100 points. However, this is attendant upon the seller not being able to pay the deficiency balance. If the seller is able to pay the deficiency balance left by short selling, then there should be no negative consequences on a credit rating.

However, a foreclosure or reduced-in-lieu will lower your score by 250 points. Now you can see why it would take much longer to raise your credit score if your home is foreclosed upon. There is a 150 to 175 point difference in how much a credit score drops in a foreclosure as opposed to a short sale.

If the seller is unable to pay the deficiency balance, creditors may file a judgment in an attempt to collect all or part of the deficiency. If that is the case, then the information is added to the credit report, and it could result in the credit score dropping a bit further. Judgment information will remain in a credit file for seven years, and it makes it very difficult to get approved for credit by other lenders.

In the event that you have already been late on your mortgage payments, then your credit rating or score will already have lowered, having to short sell is not likely to cause much further damage. If you have been able to keep up with other debt payments like an auto loan and credit cards, then the impact of the short sale will be lessened. If it is at all possible, you should keep up with your mortgage payments and other debt obligations while you are waiting for the short sale to go through.

In any event, if your lender approves the short sale, try to negotiate further regarding the impact the short sale will have on your credit rating. Try to get the lender to report the short sale to the credit reporting agencies in the best light possible, rather than in a disparaging manner. If the short sale goes on the credit report as a paid settlement, it can definitely impact the credit report in a very negative manner. The lender may accede to your request, and you may be able to have your credit rating decrease by less than you imagined.

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Source by Marco D Benavides