What impact will a short sale have on your credit score? The correct answer is that it depends. Your credit score is calculated based on a complex formula that tries to figure out the likelihood that you will not pay back your debts. The term ‘short sale’ is unlikely to appear on your credit report. The number of points you’ll lose on your credit score after a short sale will be based on how your mortgage loan was closed and on how that closed account was reported to credit reporting agencies. Normally, a short sale is reported as ‘settled debt’.
The higher your credit score is to begin with, the further your score can fall when you have a financial hardship. So, the number of points lost on a credit score after a short sale tends to be more severe for people who start with a higher score. When you have a lower credit score to begin with, the net impact of a short sale tends to be less severe. No two people have the same credit history or account activity. The effect then of one event like a short sale will be different for different people. The financial hardships that borrowers often suffer before a short sale (like a job loss) also affect their ability to pay other debts like credit cards. It’s not practical to separate the effect of a short sale from the effect of missed mortgage payments, missed credit card payments or exceeding a credit card’s credit limit. For these reasons, it is not possible to determine the exact number of credit score points you will lose after a short sale.
Although you can’t predict the number of points you’ll lose on your credit score, in most cases, the impact of a short sale will be less than the impact of a foreclosure. If you are in a financial jam, the most important question to ask yourself is whether you can afford to pay your mortgage every month for the foreseeable future. As a rule, it is always smart to try to limit the damage done to your credit report. However, if you are running out of cash, then there is no good reason to throw away the rest of your money in a futile attempt to make a few extra mortgage payments.
If a short sale is the best option given your personal situation, then you need to sell your property as quickly as possible so that you can cut your losses and get on the road to financial recovery. In this circumstance, rather than trying to ‘save your credit’, you should focus on completing your short sale so that you can begin building and repairing your credit for the future. The good news is that you cannot permanently damage your credit and blemishes on your credit report adversely impact your credit score less and less over time.
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