Short sales are a type of real estate transaction where a property is sold for less than the outstanding balance of the mortgage. While short sales can be a viable solution for homeowners facing financial hardship, they can also have a significant impact on their credit scores.
When a borrower is unable to keep up with mortgage payments, the lender may agree to a short sale as an alternative to foreclosure. In a short sale, the lender agrees to accept a lower payoff amount than what is owed on the mortgage. The borrower must typically prove financial hardship to qualify for a short sale, and the process can take several months to complete.
Short sales can have a negative impact on credit scores, but the extent of the damage depends on several factors. Here are some key things to keep in mind if you are considering a short sale:
- Short sales can affect credit scores differently than foreclosures While both short sales and foreclosures can have a negative impact on credit scores, a short sale may be less damaging in some cases. In a short sale, the lender agrees to accept less than the full balance owed on the mortgage, which can be viewed more favorably than a foreclosure, where the lender takes possession of the property.
- The impact of a short sale on credit scores depends on several factors The impact of a short sale on credit scores can vary depending on factors such as the borrower’s credit history prior to the short sale, the amount of the shortfall, and how the lender reports the transaction to the credit bureaus. In some cases, the borrower’s credit score may drop by as much as 150 points, while in other cases, the impact may be less severe.
- Short sales can stay on credit reports for up to seven years Like other negative items on a credit report, a short sale can stay on a credit report for up to seven years. However, the impact on credit scores may diminish over time as long as the borrower maintains a positive credit history.
- Short sales can make it harder to qualify for credit in the future After a short sale, borrowers may find it harder to qualify for credit in the future. Lenders may view a short sale as a sign that the borrower is a higher credit risk, which could make it harder to get approved for loans, credit cards, or other forms of credit.
- It is possible to rebuild credit after a short sale While a short sale can have a significant impact on credit scores, it is possible to rebuild credit over time. Borrowers can start by paying bills on time, keeping credit card balances low, and monitoring their credit reports for errors or inaccuracies. In addition, borrowers can work with a credit counselor or financial advisor to develop a plan for rebuilding credit and improving their overall financial situation.
In conclusion, short sales can be a useful option for homeowners facing financial hardship, but they can also have a significant impact on credit scores. Borrowers should weigh the potential benefits and drawbacks of a short sale carefully and work with a qualified professional to ensure they are making the best decision for their financial situation.