How Long Does Short Sale Stay On Your Credit
If you’re having difficulty managing your mortgage payment, a short sale can be a good option over foreclosure. However, sadly, a short sale can adversely affect the credit score, but the problem is how much will it damage your credit score?
The short sale impact relies on a variety of aspects, so you might be able to move to a new home quicker than you feel. Let’s look at how a short sale will impact your credit score:
What is a Short Sale?
A short sale is a method in which homeowners can sell their house for less than what they owe on the mortgage. If the sale is successful, the seller may end up “short” of the money required to repay the entire loan. The lender offers to consider a lower sale price to prevent foreclosure of the house, which is an expensive and time-consuming operation. Lenders typically allow the seller to establish financial distress until a short sale is accepted.
How Does a Short Sale Affect Your Credit Score?
You might be surprised to discover that the phrase “short sale” will not show up anywhere in your credit report. As per Experian, the credit report would show a “negotiated settlement” of your loan for less than you owe it. The immediate collateral risk to the negotiated deal would rely on a variety of variables, like your past financial background, and whether you were behind the mortgage payments before the sale.
FICO analyzed how mortgage delinquencies like missed payments, short sales, and foreclosures affect credit ratings. They used three fictional customers with credit ratings of 680, 720, and 780. The 2011 study showed that customers with the highest credit score had the biggest impact on their FICO ranking, with a decrease of up to 160 points. Whereas, the consumer’s credit score with a lower initial score fell by just around 100 points.
But the mortgage is not the only account that can affect the credit report after a short sale. If there is a settlement reported to the credit agencies, your credit card companies could lower your credit limits. That is because credit card firms perceive a negotiated payment as an indication that you have financial problems and seek to restrict your exposure should you stop paying your credit card bills. Sadly, the credit limit reduction often raises the credit utilization rate, which is a predictor of your credit score (lower is better).
No matter what the ultimate consequence of the short sale is, the negotiated deal will stay in the credit record for seven years. Nonetheless, the effect of short selling should decline each year because modern credit actions will have a larger influence on the credit score than the actions of the past. In reality, if you’re focusing on rebuilding your credit so, you may also qualify for a new mortgage in as early as two years, as per Fannie Mae.
How Can You Rebuild Your Credit After a Short Sale?
Whether or not you’re interested in owning a new home right now, you can focus on restoring your credit and credit score. Not only does that boost the odds of being accepted for a new loan when the time is appropriate, but it would also ensure that you are fully capable of making credit payments when the time comes.
Read below to find how you can rebuild your credit score:
1. Start an emergency fund.
Since the credit limits are now lesser, you may not be able to use credit cards as frequently in the case of an emergency. Start putting aside funds so that unforeseen expenses don’t leave you struggling to pay the bills. (Emergency contingency plans are also referred to as raindy day funds.)
2. Create a budget.
You’ll need to pay down the outstanding credit card balance to restore the credit. The budget will help guarantee that you understand how much money you’ve received per month and how much money you’ve spent to cover required mortgage obligations and living costs.
3. Pay your bills on time.
Payment history accounts for 35% of the FICO credit score estimate, so it’s essential to pay the bills on time. Arrange bill alerts or engage in automated payments to ensure that your payments are not overdue again.
4. Don’t close credit card accounts.
Losing your credit limit adversely impacts your credit score by lowering the age of your accounts and increasing the credit utilization rate.
5. Apply for new credit.
If you don’t have a bunch of open accounts following a short sale, you may want to consider restoring your reputation by starting a new credit account. If you’re having a rough time getting accepted for a major credit card, continue with a protected credit card or credit-builder loan.
The FICO research described above also looked at how long it will take for an individual to restore the FICO score after a short sale. As per their report, “while the score can start to improve faster, it may require up to seven to ten years to completely recover, given that they meet all other obligations as decided.”
For people who have trouble making their mortgage payments, short selling offers a lot of benefits. The waiting time for a new loan after a short sale is usually shorter than the waiting time after a foreclosure (seven years, as per Fannie Mae), and you could meet the criteria for cash relocation assistance.
Your credit score will take a hit after a short sale; however, you can take the correct action right away to begin rebuilding your credit score and strengthening your financial position.