Late mortgage payments make your credit score tank, especially when combined with other delinquent accounts, since the MyFICO credit score website advises that 35 percent of your score is based on how you pay your bills. Foreclosure makes things even worse, but you can sometimes avoid losing your home and minimize credit rating damage by getting your lender to agree to a short sale.
Definition
A short sale means selling your house for less than your outstanding loan balance, according to Maxine Sweet of the Experian credit bureau. Your mortgage company agrees to accept this lesser amount as full payment, rather than pursuing you for additional money like it would do after a foreclosure sale. Most lenders do not agree to a short sale unless your loan is already delinquent, because they want to avoid the hassle and expense of foreclosure.
Credit Reporting
Your credit report does not reflect a short sale as a separate entry on your credit report. Sweet explains that your mortgage loan reflects a "settled" status, which means you did not pay the full amount due. Other lenders and credit score formulas consider this negative because the mortgage holder took a loss for the remaining money owed on the account.
Credit Effects
Short sales save up to 175 points on your credit score when compared to foreclosures. MortgageFit community mentor Jessica Bennet explains that a foreclosure drops your score up to 250 points, while a short sale only pulls it down 75 to 100 points. Lenders and insurance companies that review your TransUnion, Experian and Equifax credit reports after the short sale view it as bad. They may turn you down or force you to pay higher interest rates or insurance premiums, depending on the other information on your reports.
Considerations
Mortgage lenders automatically report "settled" status to the credit bureaus unless you negotiate something different. Lita Epstein of the Wallet Pop financial website explains that you can sometimes get the bank to agree to report the loan as "paid in full," which avoids credit rating damage. Most people who do short sales are represented by an attorney. Ask your lawyer to negotiate a positive credit report status as part of the deal.
Damage Control
Your credit rating is not ruined forever by a short sale that gets reported to the credit bureaus. Experian, Equifax and TransUnion remove most negative information, including mortgage accounts, in seven years, according to the Federal Trade Commission. Rebuild your credit in the meantime by concentrating on the factors that influence your credit score the most. The MyFICO scoring site advises concentrating on debt reduction and on-time payments.
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