Data from Fair Isaac Corporation (FICO) shows that short selling can lower a consumer's credit rating by 85 to 150 points, depending on where their credit started. In the case of short selling, the impact is more significant when there is a deficient balance. Ultimately, the effect of foreclosure on credit ratings differs from one borrower to another. Some homeowners with strong credit scores may see their scores drop to 100 points or more after experiencing foreclosure.
Homeowners with lower credit scores may experience a smaller decline, but only because there's less room to fall. According to Fox Business, a short sale can lower your credit score by 85 to 160 points. In fact, the better your credit score, the more damage a short sale can cause to your credit. You might be surprised to learn that the term short sale won't appear anywhere on your credit report.
According to Experian, your credit report will indicate a negotiated settlement of your mortgage for less than you owe. Like a foreclosure, a short sale will generally have a significant negative impact on your credit rating, but the negative effect could be slightly less than a foreclosure under some circumstances. It will also discuss how to repair your credit after a short sale and how to qualify for a new home loan to buy a home in the future. In general, the effect of a short sale on your credit score is comparable to the impact that a foreclosure has on your score.
A short sale is an alternative to foreclosure in which the owner gets permission from the lender to sell the house for less than what he owes. Under the laws of your state, the creditor may be able to obtain a judgment of deficiency to sue you for this deficit once the short selling process is complete. Your agent will also ensure that all additional legal guidelines required in a short sale are followed. Your payment history is one of the most important factors in your credit rating, so a short sale could have a negative impact on your credit rating.
However, thinking that a short sale will have a less negative impact on your credit rating than a foreclosure is a common credit rating myth. As with other major derogatory events, it can take a long time for your credit scores to recover from a short sale. Homeowners often apply for a short sale due to some type of financial difficulty and must be able to prove that they cannot pay. Distressed sales were considered, including bank-owned properties, third-party foreclosure auctions, and short sales.
The lender can also include a clause in the short sale agreement that allows it to bill the borrower for the deficit. Short selling allows homeowners to avoid foreclosure and escape a situation where they owe more than their homes are worth, but a short sale will generally have a negative impact on their credit rating. A short sale and foreclosure are slightly different in how they affect your credit and future mortgage prospects, but both will remain on your credit report for at least seven years, Helali says. Filing a bankruptcy case after a short sale will allow you to remedy any deficiencies that result from the short sale.
A short sale is a viable alternative to foreclosure, but it's not the only solution if you can't afford your mortgage.