Credit scores are not calculated on one specific item; the score is based on a compilation of many factors. Short sales show on your credit report as a home lost to creditors, but a short sale is a better alternative than foreclosure or bankruptcy. If you are concerned that a short sale will ruin your credit, consider the impact of the alternatives.
Definition
A short sale is the term for selling a home for less than the outstanding balance on the mortgage loan. Short sales must be approved by the current mortgage holder. Many lenders approve short sales in order to get the most return possible on a property; homeowners who resort to a short sale do so in lieu of a possible foreclosure or bankruptcy.
Reporting
The impact a short sale can have on a credit score depends on how the current mortgage lender reports the transaction to the three credit bureaus, Experian, TransUnion and Equifax. Most lenders report short sales as "settled," according to Experian. This means that the mortgage lender agreed to accept less than the outstanding balance.
Impact
Paying less than the outstanding balance on a mortgage loan will have a negative impact on the borrower's credit scores. Accounts classified as "settled" work to decrease a FICO score, but they are only part of the overall equation. FICO scores are calculated based on payment history, amounts outstanding, types of credit, new credit and credit history.
Calculations
Certain factors included in a credit score calculation carry more weight than others. Payment history accounts for 35 percent, and amounts outstanding make up 30 percent of the overall credit score. New credit and types of credit used make up 10 percent each, and your length of credit history is 15 percent. A short sale is part of the payment history calculation.
Conclusion
Short sales will have a negative effect on your credit score for seven years, but a short sale will not ruin your credit on its own. Negative items on your credit report have less emphasis over time. A short sale within the past six months will have a greater impact on your credit score than one from two years ago.
0 comments:
Post a Comment