What happens to the homeowners credit?
What Happens to the Homeowner's Credit After a Short Sale?
A short sale can have a negative impact on a homeowner's credit score, but it is generally less damaging than a foreclosure. The extent of the impact depends on various factors, including the homeowner's overall credit history and the lender's reporting practices.
Note: While a short sale can affect credit, it is often considered a better alternative to foreclosure or bankruptcy for minimizing long-term damage to credit.
- Impact on Credit Score: A short sale can lower a homeowner's credit score by anywhere from 50 to 200 points, depending on their previous credit history and the specific credit scoring model used. The impact may be more severe if the homeowner was already delinquent on payments before the short sale.
- Reporting to Credit Bureaus: How the short sale is reported to credit bureaus can vary. It may be reported as "settled for less than the full amount," "paid as agreed," or "settled." The wording used can influence the degree of impact on the homeowner's credit score.
- Length of Time on Credit Report: A short sale can remain on a homeowner's credit report for up to seven years, similar to other negative marks such as late payments or foreclosures. However, the negative effect on the credit score may diminish over time as the homeowner continues to make timely payments on other accounts.
- Future Borrowing Ability: While a short sale does impact credit, it may still allow the homeowner to qualify for a new mortgage sooner than after a foreclosure. Many lenders require a waiting period of 2-4 years after a short sale, compared to 5-7 years after a foreclosure.
- Mitigating Credit Damage: Homeowners can take steps to mitigate the damage to their credit, such as making timely payments on other debts, keeping credit card balances low, and avoiding new negative marks on their credit report.
- Potential for Lender Deficiency Judgments: In some cases, the lender may pursue a deficiency judgment against the homeowner for the difference between the sale price and the remaining loan balance. This could further impact the homeowner's credit if not addressed promptly.
- Consult a Credit Counselor or Professional: Homeowners should consider consulting with a credit counselor or financial professional to better understand the impact of a short sale on their credit and to develop a plan for rebuilding their credit over time.