How Does a Short Sale Affect Credit?

How Does a Short Sale Affect Credit? article image.

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A short sale can hurt your credit scores because you're settling your mortgage loan for less than you owe rather than repaying the full amount as agreed. As with other negative marks, the exact impact on your scores will vary depending on your overall credit history and the scoring model used to calculate your credit score. However, you can take steps to improve your credit and limit the long-term effect.

How Do Short Sales Work?

A short sale is when you sell a home for less than your outstanding mortgage balance. It's a way to get out of a loan when you're underwater (meaning you owe more than the home's currently worth) and avoid foreclosure if you're having trouble affording your payments.

Before you proceed with a short sale, you'll need your lender's approval. Often, lenders may agree when a borrower runs into financial trouble—such as a job loss or medical emergency—and the lender determines a short sale will be more favorable than foreclosing on the property.

If you're approved, you'll still need to go through the home-selling process, which can be more complicated than a normal sale because your lender will ultimately be the one to accept or decline a buyer's offer. The timeline could also be drawn out if you have several lienholders (for instance, if you have a home equity loan or home equity line of credit), or if your lender sold your mortgage to an investor.

After a short sale, you may be responsible for the difference between the sale price and the outstanding balance unless you get a waiver of deficiency from the lender or live in a state that doesn't allow deficiency judgments.

Does a Short Sale Show Up on Your Credit Report?

A short sale will show up on your credit report, but you might miss it if you don't know what to look for. That's because you won't actually see the words "short sale." Instead, your mortgage loan account will have special codes applied that label it as "settled" and "account legally paid in full for less than the full balance."

Once your credit report is updated with this information, you may see your credit scores drop. Because payment history is one of the most important scoring categories, settling a debt may have a large negative impact.

Your exact point change will depend on the other information in your credit report, the scoring model and whether your lender reports a deficiency balance. When a deficiency balance is reported, the short sale might impact your credit scores like a foreclosure or deed in lieu of foreclosure would. Short sales without a reported deficiency balance could hurt your scores less than a foreclosure.

The overall impact on your scores may also be less if you didn't miss payments before selling the home. In contrast, foreclosures are always preceded by late payments.

Credit scoring aside, a short sale can also be a better option than foreclosure because you won't need to wait as long to qualify for an FHA loan if you want to buy another home.

How Long Does a Short Sale Affect Your Credit?

A short sale could impact your credit scores as long as it remains in your credit reports, which may be up to seven years—similar to many other negative marks. If the short sale was preceded by one or more late payments, the seven-year timeline starts with the date of first delinquency that led to the short sale.

If you never missed a payment, the mortgage account will fall off your credit report seven years after your account was reported as settled.

How to Start Rebuilding Your Credit After a Short Sale

As with other major derogatory events, it can take a long time for your credit scores to recover from a short sale. It may be several years before your score fully recovers if you previously had a good credit score. Or, you may have to wait the full seven years if you had an excellent score. (People who have higher scores tend to experience larger score drops from new negative information in their credit reports.)

In the meantime, similar to what you might want to do after a missed payment, bankruptcy or foreclosure, you can look for ways to rebuild your credit.

  • Don't miss loan and credit card payments. Making your bill payments on time adds positive information to your credit reports, which can help you improve your credit scores. Conversely, late payments typically hurt your scores, so try to always make at least the minimum payment on time on all your accounts, every billing cycle.
  • Open new accounts. If you don't have any loans or credit cards, you may want to open accounts that can help you build credit. Secured cards and credit-builder loans are often good options for people who have poor credit. Depending on your credit, you could also look into good rewards credit cards, including options without annual fees.
  • Boost your score. You can sign up for Experian Boost and add utility, cellphone and certain streaming service payments to your Experian credit report. These payments aren't otherwise included on your credit report, and their presence can then help improve your credit scores that are based on your Experian credit report.
  • Pay down debts. Paying down the balances on your revolving accounts, such as credit cards and some lines of credit, can help lower your credit utilization ratio and may quickly improve your credit scores. Paying down installment accounts (auto, student and personal loan balances fall into this category) can also help your credit scores, but it might not be as impactful as lowering your credit utilization ratio.

If you're running into trouble with other bills, reach out to your creditors before you miss a payment. Ideally, you'll be offered a different repayment plan or a hardship program that's easier to manage and can help you avoid additional negative marks on your credit.

Check and Monitor Your Credit After a Short Sale

You can check your credit report from all three credit bureaus through AnnualCreditReport.com. You can also sign up for an Experian account to monitor your credit for changes. Experian gives you free access to your Experian credit report, which will be updated every 30 days when you sign into your account, and a free FICO® Score based on your report. The complimentary credit monitoring can also send you alerts, warning you of potential identity theft or fraud. If you do find something is amiss, you can address it quickly.

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