How Short Sales Affect Your Credit for a Couple of Years

When your mortgage debt exceeds the value of your property, your lender may allow you to sell the house for less than you owe. Lenders refer to these transactions as short sales. Although your lender approves the transaction, you essentially failed to honor your original loan agreement and therefore a short sale can have a damaging impact on your credit score for a number of years.

Closed Accounts

When you take out your mortgage, your lender informs the credit bureaus about the size of the loan and the monthly payments you are required to make. When you enter into a short sale transaction, your lender reports the closing transaction to the credit bureaus. The credit bureaus take note of the difference between the balance owed and the final payment on the debt. Details of the short sale remain on your credit report for seven years, and other creditors can see that you did not repay your mortgage in full simply by reviewing your credit report.

Late Payments

Lenders are under no obligation to enter into short sale agreements and only allow people to arrange short sales as a last-resort alternative to foreclosure. People who have fallen behind on their mortgage payments often end up entering into short sale agreements. Credit bureaus maintain records of 30-day-late payments and, like short sales, late payments remain on your credit report for seven years. Therefore, late payments may have already caused your credit score to drop long before you actually complete a short sale.

Credit Score

The credit bureaus assign you a credit score that reflects your overall credit management, and this score can rise or fall regularly as the credit bureaus receive updated information from your creditors. However, credit bureaus focus more on your recent credit activity than your past activity. With every year that passes a short sale has less of an impact on your credit score. The more positive account history you have, the less harm a short sale can do to you in the long term.

Considerations

Although a short sale has a negative impact on your credit report for at least a few years, it does not cause as much harm as a foreclosure. You can obtain a new mortgage within a few years of being involved in a short sale and you can obtain a new Federal Housing Administration-backed loan without any time constraints if you never fell behind on your loan payments before your short sale. Most lenders require you to wait for between five and seven years before obtaining a loan after you go into foreclosure. Additionally, foreclosures take longer to settle and therefore you have to wait longer before you can begin to repair your credit score.