A homeowner who cannot pay his mortgage may opt for a short sale as a way to avoid foreclosure. A short sale occurs when the property is sold for less than the outstanding loan, and the mortgage company forgives the remaining debt. Homeowners may believe that a short sale will have less impact on their credit than a foreclosure, but in fact a short sale does turn up on your credit report and will lower your score.
How a Sale Is Reported
When you complete a short sale, the mortgage company is almost certain to report this event to the credit bureaus. It will show up on your report, but it will not be labeled as "short sale." The wording varies, depending on what is reported, but it may be called a "redemption," a "pre-foreclosure redemption" or a "settlement."
Effect On Your Score
The appearance of a short sale on your credit report will have a negative effect on your credit score. You could expect a foreclosure to lower your score anywhere between 85 and 160 points. The higher your score before the foreclosure, the bigger the hit. A short sale can affect your score by a very similar amount. According to Fair Isaac, the company that produces FICO scores, the range for a short sale is the same as that for a foreclosure.
Negotiating With Your Lender
If you have had a positive relationship with your lender, and have cooperated well over the short sale, it may be possible to ask the company to report the sale to the credit bureaus as "paid as agreed." This will mean the sale will have no negative effect on your credit. It's rare for a lender to agree to this, but it's worth asking.
Before The Sale
If you have managed to minimize your delinquency ahead of the short sale, this will also help. Most people who go through a foreclosure have usually had at least 90 days of delinquency on their mortgage payments ahead of the foreclosure itself, so their credit scores have already gone down significantly. If you can swiftly arrange a short sale before your delinquency gets to that level, you will be able to minimize the damage to your credit score.
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