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What is short sale impact on credit score ? Finance ? Mortgage
There can be many factors such as late payments, mortgage defaults, bankruptcy and foreclosure that affect your credit and one particular aspect you may wish to consider is the short sale impact on credit score. Generally, if your home is worth less than what you owe your mortgage provider and you can no longer afford to make the payment, a short sale may be conducted. In a short sale, which is otherwise referred to as a pre-foreclosure, your lender agrees with you to settle the mortgage debt for less than the balance, pending a successful sale to a new buyer. While a short sale does avoid the negative credit consequences of a foreclosure, the short sale impact on credit score is generally quite adverse.
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A short sale is a clear indication of financial distress and hence its impact on credit score can be quite severe. While your credit score and short sale have a direct relationship, it isn?t as strong a relationship as that between credit and foreclosure. Additionally, while the negative impact of a foreclosure would show on your credit report only after 30 days after the foreclosure has been completed, the foreclosure filing will render you unable to obtaining future credit for several years.
Since foreclosure is an extremely painful option, it is natural for you to wonder- is short sale a better option? In a short sale, the lender agrees to accept less than the balance owed on the mortgage at sale and generally the deficiency balance is forgiven. But there have been instances of certain lenders asking borrowers to agree to accept liability for the deficiency balance. It is therefore, advisable that if you are evaluating between the two options of a deed in lieu of foreclosure or a short sale, you must review the terms and conditions carefully and check whether the deficiency balance is forgiven.
Many times the reason why some lenders prefer short sales rather than foreclosure is the fact that foreclosure is an expensive and time consuming process. Also, through the short sales route, they wouldn?t have to own the distressed property and would be able to recover some of their money in spite of losing the deficiency balance. But a short sale clearly implies that the home owner almost lost the home due to defaults on mortgage payments and therefore a short sale has a severely negative impact on the credit score. In general, if you are more than 59 days late on your payments, the effect of a short sale on your credit report is expected to be identical to that of a foreclosure. It would generally show up as a pre-foreclosure in redemption status on your credit report which may actually result in a loss of 200 to 300 points. But every case is different and you may be lucky to get away with a drop of only about 100 points.
If you are trying to decide whether to let your home go through foreclosure or to opt for a short sale, a short sale may not offer a significant advantage in terms of salvaging your credit. Practically there may not be any credit score advantage on a short sale over a foreclosure. But on a positive note, there is generally less damage to a credit report after a short sale involving late pays than a foreclosure. Additionally, after a short sale, you may be able to buy another home within 2 years instead of the 5 to 7 year period required for foreclosures.
There may be other considerations that you may have when it comes to making a choice between a short sale and foreclosure and it is advisable that you seek legal as well as tax advice before taking your decision.
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Source: http://realestateinvestingfacts.com/blog/6374/short-sale-impact-credit-scores/
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