If decreasing home worth leave you owing your lender more than your home is worth, a brief sale could be your best option. If your lender approves a brief sale, it allows you to market your home”brief” by marketing and selling the property at fair market value. Though short sales advantage homeowners stuck in upside-down mortgage loans, they have a negative effect on credit scores.
Short sales have a derogatory effect on your credit score, however, the amount of damage your credit will incur is dependent on how your lender reports the brief sale. Since there is no entry specifically for”short sale,” your lender can report the debt as”paid as agreed,””negotiated” or”settled.” Ideally, you need your lender to report your mortgage as”paid as agreed,” because this notation does not carry any adverse credit consequences. A negotiated or settled debt on your credit report is deemed derogatory both by the credit bureaus that decide your score and future creditors.
The number of credit points you stand to lose after a brief sale is dependent upon how high your credit score was once you initiated the procedure. The FICO credit rating formula is sensitive to small variations in credit history, which makes it impossible to forecast how much your credit score will suffer beforehand. You will lose as little as 50 points or as many as 200 points, depending on your history and how the bank reports that the transaction.
After upgrading your credit file, the bank has to include all information on your accounts in one transaction line. The Fair Credit Reporting Act stipulates that, with the exception of some public records, negative trade lines can remain on your credit accounts for no more than 7 decades. Following 7 years pass, all evidence of your short sale will evaporate from the credit report.
When calculating credit scores, the payment history carries a greater weight than any other factor. Thus, you can mitigate the damage your short sale does to your credit report in case you don’t miss any payments to your lender before selling the home. Additionally, the more recent a credit entry is, the greater effect it has on your credit score. As long as you practice good debt management after your short sale, the negative effect it has on your credit will decrease over time.
Participating in a brief sale rather than permitting the bank to seize your home through foreclosure is advantageous to you because it prevents a foreclosure notation on your credit report. A foreclosure listing automatically disqualifies you from being qualified for a new mortgage loan for a predetermined period of time, depending on the lending company. Mortgage purchaser Fannie Mae, as an instance, will not accept mortgage loans from creditors if the debtor lost a property to foreclosure over the last 5 to 7 decades. Although a brief sale damages your credit score, that damage isn’t as long lived as foreclosure injury, allowing you to be eligible for a new mortgage loan sooner.