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Short Sale and Credit Score
If you are facing a foreclosure you may want to read this article on short sale. It will provide information on how short sale affects your credit and the difference between short sale vs. foreclosure. Keep reading to find out if choosing a short sale is right for you.
How a Short Sale Affects Your Credit
One of the ways that some people try to avoid foreclosure is by doing what is known as a short sale. This is an interesting arrangement in which the mortgage lender agrees to a home sale that amounts to less than what is owed on the mortgage. This is most likely to happen when a home has lost value or the equity has been tapped out. In such cases, there is often not enough equity in the home anyway to pay for the costs of discharging the mortgage as well as the costs of the sale.
Short sale v. foreclosure
In a short sale, your home is sold. If you make the proper arrangements, you can actually manage to avoid having the home show up as a foreclosure. With a short sale, though, you usually have to have tried to sell the home for 90 days at market value. If that doesn't work, your lender may agree to allow you to sell the home for less than what is owed on the mortgage. Mortgage lenders are also more likely to let you do a short sale if you are at risk of foreclosure, or have stopped making mortgage payments. The difference is written off by the lender, you may be required to pay taxes on the difference as income, since it counts as mortgage forgiveness.
With a foreclosure, the bank takes over the ownership of your home. The bank repossesses the home and tries to resell it at their own expense. In many cases, a foreclosure costs the bank more than a short sale. Additionally, a foreclosure shows up as such on your credit report, and can remain for seven to ten years.
The short sale and its affects on your credit
A short sale has its effects on your credit score, just as a foreclosure does. Indeed, initially, a short sale can damage your credit score by as much as 200 or 300 points initially. If you have missed some mortgage payments prior to the short sale, the damage is likely to be closer to 300 points. In some cases, your credit report may list the short sale as "pre-foreclosure." However, this is still not as bad as an actual foreclosure.
More differences arise between a short sale and a foreclosure in the long term effects on credit. The waiting period before you can get a home after a foreclosure is at minimum four years, and can even be as long as six years – especially if you want a somewhat reasonable interest rate. With a short sale, the wait is closer to two or three years. This means that if you improve your financial habits and work on your credit score, you can recover from the disastrous drop sooner if you had a short sale than if you went through a foreclosure.
If it comes right down to it, in the long term it can be more helpful in terms of your credit to try to do a short sale. However, you should be prepared: Your mortgage lender will probably try to get you to turn over other assets (especially if you have some cash) in return for allowing the short sale to go through. It can be difficult to get approved for a short sale, although the current economic climate is making it less difficult than before.
In the end, it's best if you can work out some way to make your mortgage payments. If you do not have to move for any reason, it is worth it to try loan modification or refinancing (if your credit is good enough right now) in order to avoid having to make the decision between a short sale and a foreclosure.
Related Article: How Foreclosure Affects Your Credit Score >>