Credit Score in 95531>Question Details

Kp, Home Seller in 48197

Affect of Short Sale on credit

Asked by Kp, 48197 Fri Jan 15, 2010

I am thinking of going in to a short sale for my current home. My job hours have been cut. I also own rental propery that is earning enough to pay the rental mortage. My credit scors has taken a hit with having both house and with the job problems whch have resulted in late mortage paments. Will the short sale hurt my credit even more or will it help because I no longer have that morgage on my credit report.

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Bradley Gill’s answer
Hi KP, Great questions…you should definitely do a lot of research and ask a lot of questions before considering a short sale as it’s never a guaranteed solution.

Here’s what you can expect for your credit scores - your scores will definitely tumble, just as if you were being foreclosed on, this is because most times lenders will not consider your file for short sale approval unless you are delinquent on your mortgage, or you will already be delinquent on your mortgage and must proceed with a short sale in order to avoid a foreclosure.

With every missed and delinquent mortgage payment (and short sales take time so you may have 4-8 or even more missed payments) you can expect your scores to generally fall 30-40 points with each passing month. This can wreak real havoc on your scores and even cause other creditors to reduce or even repeal your accounts – this is especially true of credit card accounts.

So generally speaking, your credit score will be just as badly affected by a short sale as by a foreclosure.
The main difference is how fast your credit will be able to recover after the short sale has been completed.

Here’s an important point to consider, the key to rebuilding your credit after a short sale (or even foreclosure) is to keep on top of all your other credit accounts – be sure you pay everything else on time. Your credit scores are calculated based on an aggregate of all your account activity, so if you keep your other 3 credit card accounts, 2 student loans, and 1car payment in good standing, then your credit will be able to quickly heal itself.

Short sales also have different long-term repercussions on your credit than a foreclosure. With a short sale the lender will most likely report your debt as “settled for less than full.” But this will be dramatically better than having a fat “foreclosure” showing on your account as reason for settlement.

If you are thinking about purchasing another home in the future, Fannie Mae and Freddie Mac (and even FHA) will require that you wait at least 2-3 years before they will allow you the financing to purchase another home, compared to 5 -7 years after a foreclosures.

And another thing to consider - Be sure to protect yourself and seek professional assistance regarding possible income tax implications or legal issues. See my blog post on short sale risks here: http://www.eaglehomegroup.com/ShortSaleBasics

Hope this helps!
0 votes Thank Flag Link Fri Jan 15, 2010
KP in order to qualify for a short sale you need to prove that you cannot pay your bills, so your credit should already be in bad shape.

The good news is that a short sale is better than foreclosure. If you allow the bank to foreclose you'll not be able to buy a new home for five years. With a short sale it is only two years.

See below great article in WSJ.
0 votes Thank Flag Link Fri Jan 15, 2010
Keith Sorem, Real Estate Pro in Glendale, CA
MVP'08
Contact
The short sale will impact you credit just not as severe as a foreclosure, keep in mind that the points that add up quick are late payments and cost 30-40 points on average for each one. For a list of complete information on a short sale visit my website here @ http://www.vgrouphomes.com/atj/user/AdditionalGetAction.do?p…

John & Sarena Villaescusa
Owner/Realtor/Broker
Keller Williams Realty
Cell: 562-818-2671
Email:Johnv@kw.com
Website: http://www.VGroupHomes.com
Web Reference: http://www.VGroupHomes.com
0 votes Thank Flag Link Fri Jan 15, 2010
It's unlikely that it won't affect your credit score in some way. It's not as much as a foreclosure but your credit will take a hit. You will need to check into the short sale requirements before doing anything. With a short sale, you must be in a hardship position. You loss of income could qualify, but you also can not have any assets. Your rental property will probably count as an asset.
0 votes Thank Flag Link Fri Jan 15, 2010
KP -

I have had some short sale clients not recognize any hit on their credit but the majority have seen anywhere from 30-100 point hit. It depends on the lender and the reporting. It is hard to believe it will not be noted on your credit report but it has happened. The exact hit is hard to predict.

CJ
Web Reference: http://www.TalkToCJ.com
0 votes Thank Flag Link Fri Jan 15, 2010
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