Doing a short sale may be more credit-friendly than a foreclosure, but that doesn’t mean you’re safe from the damage. Short sale credit effects cannot be avoided—but luckily, they can be controlled much more easily than a foreclosure. What a short sale does to your credit depends on several factors, such as the amount you owe and how far behind you were when the short sale closed. Here’s a quick look at how short sale credit effects happen and what you can expect after closing day.
Effects of Delinquency
Most borrowers have missed at least two months’ worth of mortgage payments before initiating the short sale. In fact, this is a requirement for most banks, as well as the HAFA short sale program. This accounts for a significant part of the short sale credit impact. By the time a short sale application is submitted, there may already have been some short sale credit damage. One thing you can do is try to negotiate a short sale while you’re still current—with sufficient proof of hardship, your bank may approve your request anyway.
The difference between your home’s selling price and your mortgage balance, known as the deficiency, is probably the biggest factor in short sale credit effects. Lenders will try to earn as much as possible from the sale to make up for their losses or at least minimize it. For your part, try to sell it for as much as possible, or even invest in a few upgrades to boost your home’s value. The less the lender has to forgive from your balance, the lower the short sale credit impact will be.
There aren’t many rules on how a short sale should be reported, so lenders tend to word them differently from each other. What appears on your credit report can either be a “pre-foreclosure in redemption,” “paid as agreed,” or even a straight foreclosure. This depends both on your mortgage situation and your lender’s policies. If you have a capable agent, he or she may be able to discuss reporting with your lender and have it worded so that the short sale credit damage won’t be as high.
Fixing the Damage
Once the short sale has closed, you can start working on getting your credit score back up. Start by saving up as much as you can, so you’ll have liquid funds for emergencies instead of taking out more credit. Limit your credit cards to just one, and use it only when you need to. If you’ll be renting a home afterwards, find a landlord who regularly reports to the credit bureaus, so you can build a good rental history and improve your credit score faster.
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