Short sales get you out of a bad situation by letting you sell your house for less than what you owe. Your mortgage is part of your credit bureau records, including your balance, entire payment history and ultimate pay-off. Short sales become part of your credit records and hurt your credit if you do not negotiate the way in which your mortgage holder reports the information to the credit bureaus.
Definition
A short sale is an agreement between you and your mortgage company to sell your home for less than the actual mortgage balance. Homeowners use this strategy to avoid foreclosure when they cannot afford their mortgage payments and their loan is "under water," meaning that the market value of the house is below the outstanding amount. Mortgage holders sometimes agree to a short sale in lieu of a foreclosure to spare themselves the expense of repossessing and selling the home.
Effects
Most people who go through a short sale already have damaged credit, since banks are often reluctant to agree to the transaction unless the loan is already delinquent. The late mortgage payments cause significant damage to a credit score, since timeliness of payments accounts for more than 1/3 of your credit score. The short sale shows up as a settled account rather than a paid-in-full loan because the mortgage holder forgives part of the outstanding amount in a short sale. Settlements hurt your credit score and look bad to creditors reviewing your credit reports, since they show you could not fulfill an outstanding financial obligation. The impact is nearly as bad as a foreclosure, according to Bankrate.com writer Leslie Geary.
Prevention
You can sometimes prevent the hurtful effects of a short sale on your credit by negotiating with your mortgage holder. The mortgage company decides how it will report the transaction to the Experian, TransUnion and Equifax credit bureaus. There is no negative impact if it reports your loan as paid in full rather than settled for less than the actual balance. Request favorable reporting as part of the short sale negotiations. The company is not obligated to honor this request, or even to approve your short sale, but you avoid a huge hit to your credit rating if you get this agreement.
Considerations
Damage to your credit from a short sale does not last forever. Geary advises that it has the greatest impact in the early months. You offset the bad effect every time you make an on-time payment on your remaining accounts. The short sale automatically disappears from your credit records in seven years, but its effect is usually minimal by that time if you reestablish your credit with other accounts.
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