The Effect of a Short Sale on Your Credit Rating

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Short sales have become a popular alternative to foreclosures in a market where many sellers have negative equity. A short sale allows you to sell your home below the loan amount, meaning you make no money off of the sale, and the bank agrees to take a loss on the property. There are some advantages to a short sale, especially if the alternative is a foreclosure; however, there will be an impact on your credit rating.

Immediate Effect on Credit

It is estimated that your credit score will drop by 200 to 300 points with a short sale. This can vary with each individual, some reporting only a 100 point drop. It also depends on how many months behind you are on your mortgage. A short sale shows up as late payments, a collection and a derogatory public record. A 200 to 300-point drop is very similar to a foreclosure, so in that respect, there may be no difference between a foreclosure and a short sale.

Future Effect of a Short Sale

The big advantage of a short sale is the ability to get another mortgage only two years after the short sale. Usually, a foreclosure requires five to seven years before the borrower is eligible for another mortgage. The short sale will stay on your credit for up to seven years and can affect the ability to open credit cards and other loan accounts.

How to Fix Your Credit after a Short Sale

If you decide a short sale will be right for you, and your lender agrees to it, then you will see an immediate drop in your score once the lender reports it the credit bureaus. There are some things you can do to lessen the damage and build your credit back. Be sure to keep all other accounts open. You will likely not be able to get any new accounts for a while, so don't close any credit cards. Your credit score is largely based on paying on time and keeping balances low. You can help your score by charging a little on your cards but keeping the balances under 30 percent of the credit limits and then paying them off on time every month. Credit is based also on how long your accounts have been open, so you don't want to close any accounts even if you are not using them. Don't apply for any credit right away, since you will likely be denied and you don't want the inquiries. After two years, you can apply for another card if you don't have much credit history. Also, you can attempt to obtain a new mortgage. FHA loans are available two years after a foreclosure or short sale, and with an explanation about the circumstances leading to either of these events, it will be possible for you to be approved. Conventional loans are available two years after a short sale but not for seven years after a foreclosure.