The Impact of Short Sale on the Credit Score of the Homeowner

What is the impact of short sale on the credit score of the homeowner?

When a homeowner cannot make their mortgage payments, for whatever their personal reason is, and they have no equity in the property they have two options: foreclosure, short sale, or bankruptcy. While losing your home may be stressful, most clients are more worried about the future: when will they be able to buy a home again?

Sadly, all three of the above options will have a negative impact on the homeowner’s credit score. Let’s take a look at the options:

1. Foreclosure – By the time the lender files for foreclosure, you have missed two, four, six, maybe more payments. The foreclosure process can last a year or more, by which time you have missed 12 or more additional payments. When the judgment of foreclosure is entered, you may be responsible for additional costs, or in extreme cases the difference between the foreclosure sale price of the property and the amount of the mortgage. Then a foreclosure is added to your credit report and your credit score drops further.
2. Bankruptcy – May allow you to keep some of your property, maybe even your home if you have enough other assets, but it will essentially strip you of everything you are worth to pay off your creditors. A bankruptcy is also one of the most devastating negative marks you can get on your credit report.
3. Short Sale – By entering into a short sale agreement, you can stop the negative impact of missed payments as soon as you know a problem exists. You can even file for short sale without missing any payments – something most lenders won’t tell you! While some lenders may report short sales to credit bureaus, the credit score impact of a short sale is for less than that of a foreclosure or bankruptcy.

Since Short Sale has a smaller impact on your credit score, and can save the additional missed payments that come with foreclosure or bankruptcy, the overall impact on credit is much lower. Therefore, credit scores will recover much faster after a short sale. Short Sale is not always the better choice, but all things being equal, it is almost always the lesser of three evils.

The option of short sale is available to homeowners at almost any time! If you owe more than your house is worth, it may be the right option for you.

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