Falling property values mean many people are upside down on their mortgages, according to the Bankrate.com financial site. Those homeowners owe more money that their houses are actually worth. Some opt for short sales to avoid foreclosure and its devastating credit effects. Short sales hurt your credit rating, too, but not as severely as actually losing the property.
Definition
A short sale means selling your home for less than you owe on your mortgage loan, Bankrate.com explains. Your lender must agree to the sale and amount, and most agree not to pursue you for payment of the remaining balance. Some mortgage companies allow a short sale to avoid the expenses involved in repossessing and reselling a home. You sell often the home more quickly because you are asking a low price.
Effects
You already have damaged credit if you were not paying your mortgage or were sending in late payments in the time leading up to the short sales. Your bank causes additional damage by reporting the loan as "settled for less than full amount" to the Equifax, Experian and TransUnion credit bureaus. This is a negative status that tips other lenders off to the short sale. Ask that your mortgage loan be reported as paid in full, and get this agreement in writing, along with a paper that absolves you of the remaining loan balance. Check the status when the sale is complete by ordering credit reports from annualcreditreport.com. The Federal Trade Commission explains that each credit bureau is required to give you one free copy each year through that website.
Damage Control
You can start with credit rating damage control immediately after your short sale. Create a budget that redirects the money saved from excessive mortgage payments onto your other bills. MyFICO, the Fair Isaac credit scoring website, explains that payment delinquencies are one of the worst drags on your score. Pay everything on time and avoid running up more debt until your finances are fully back on track.
Circumstances
Short sales should be considered carefully and only used in appropriate circumstances. Natalie Lohrenz of counseling for Consumer Credit Counseling Service of Orange County in California explains that you should try to get through short term problems, like illness or temporary unemployment, without getting rid of your home. Short sale is appropriate if letting the bank take your home is your only alternative.
Considerations
Short sales are rarely an option if you have two mortgages on your home. Your primary lender might agree to take a loss, but Bankrate.com explains that the second mortgage holder would forfeit its entire interest in the property. You must either find a way to pay the bills or risk foreclosure if you are stuck with dual home loans.
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