How Does a Short Sale Affect Your Credit?

Many people often believe that a short sale does not affect their credit at all. For this reason, they choose this option when they are having difficulty making payments on their home. They believe that this is going to be better for them than an actual foreclosure. What most do not realize is there are negative effects to choosing this option, as well. In fact, the damage to your credit score may be just as harmful as a foreclosure.

First, it must be stated that a short sale, while it is not a foreclosure, will still put a mark against your credit. After all, the lender is going to be on the losing end of the deal and, with the high rate of foreclosures and short sales, they are taking too many big hits. In fact, the combination is why the government stepped in to bail out some of the lenders out. These lenders, when it comes to retribution, are not going to let the borrower get away without any concerns.

With this in mind, borrowers must realize there will be a consequence to their credit when choosing a short sale to sell their home. In fact, a recent study that was completed by VantageScore, a credit scoring company, revealed that there is only a difference of an approximate 10 to 20 point drop between someone going through a foreclosure and one going through a short sale. Both drops are significant, foreclosure causing a credit score to lower as much as 130 to 140 points, while a short sale was between 120 and 130 points drop.

Along with a lowered credit score, individuals who choose the short sale may also be responsible for paying the difference to the lender. This depends on which state you live in and whether or not the lender is pushing to get the money back. In truth, many lenders are choosing not to employ this option. However, this is something that you should not count on. If it is demanded and it is not paid back, this, too can mar the credit score and prevent one from financing another home in the future.

Borrowers will also find they are responsible for paying taxes on the difference between what the home sold for and the amount they owed on their loan. In many cases, the difference could be as much as $100,000. If not prepared for this outcome, individuals could find themselves in trouble with the IRS, as well as their lender. This is the last thing that anyone in this circumstance needs to add to their situation.

Anyone who finds themselves suddenly having difficulties trying to keep up with their mortgage payments may immediately think their home is going to be foreclosed on. This process actually takes several months to get underway and this may leave you time to consider a short sale on your home. While the short sale will cause some damage to your credit score, and even less if you keep your payments current, the records will also state that you did try to prevent your home from being foreclosed on. This, of course, will look much better than sitting back and doing nothing to stop it.

Whether the bank cares about that later on is anyone’s guess. Many advisors say that as long as you pay your bills on time for 24 months after any major credit damage, you should be able to get a loan. As your credit score plays a very important role in your life, do the research on your own particular situation to help you make the right decision for you and your family. As around to friends who have gone through similar problems and speak to a financial advisor.