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How does a Short Sale Impact Credit?
Because of its growing popularity in terms of real estate mortgage solutions, many homeowners are dying to know how a short sales impact credit scores or ratings.
Essentially, in order to accurately judge how a short sale impact credit history, you would need to have an understanding of how short sales occur. In the context of real estate, short sales happen when the lending facility agrees to accept payment for a debt that is less than the total amount owed.
Short sales actually are made against a home primarily because of lack of equity. In contemplating how a short sale impact credit, it is important to realize that not all lending facilities will agree to short sales. The perceived complexity surrounding short sales is the reason why lawyers and real estate agents usually get involved in its transaction. Exactly how does a short sale impact credit ratings? The answer lies on the perception of the different credit rating bureaus.
How does a Short Sale Impact Credit Score?
According to a report released by Fair Isaac, the credit score of a borrower can be affected by short sale options. This is despite the fact that the credit history will not reflect any foreclosure being undertaken on the real property. It is necessary for homeowners to understand how a short sale impact credit history, especially in the light of its growing popularity with lending facilities.
In terms of how a short sale impact credit history, one of the best ways to gauge it is with the average points that are lost from the FICO score of the borrower. Basically, when a borrower defaults on a mortgage loan and eventually takes advantage of the short sale option, the following points may be deducted from the FICO score:
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Late for a period of 30 days – 40 to 110 points
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Later for a period of 90 days – 70 to 135 points
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Short sale, deed-in-lieu, or foreclosure – 85 to 160 points
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Bankruptcy – 130 to 240 points
As you can see, the average point deductions for short sale, foreclosure, and deed-in-lieu are basically the same. In the context of how a short sale impact credit, homeowners should realize that despite the relatively equal average point deductions, many lending facilities favor short sale over deed-in-lieu and foreclosure.
How does a Short Sale Impact Credit History against Foreclosure?
In comparing short sale impact as opposed to the effects of foreclosure, it is vital to note that short sale has a relatively less damaging effect. The reason is that with short sale, the borrower can actually work with the lender in order to negotiate the terms and conditions of the transaction.
With short sale, the borrower may or may not miss any payments, but the lender can still report the transaction as paid in full. Asking how does a short sale effect my credit score? In this instance, the answer would be very minimal. Keep in mind though that in order to reap the benefits of better credit score, the lender needs to approve the short sale first.
To get the approval, the borrower must prepare an information packet which details his financial condition. Regardless whether a fast approval is given by the lender or not, the fact remains that no foreclosure report will be included in the credit score. This means that there is lesser negative effects with short sale compared to the foreclosure option.
FICO Credit Scores and the Effect of Short Sale
How does a short sale impact credit rating based on FICO scores? To get a better understanding of the effect of short sale on the credit score in this instance, it is important to know that the world of FICO scoring is affected by three credit events. These events are Serious Delinquency, Derogatory Public Record, and Collection Filed. Any of these three actually carry the same weight in terms of affecting FICO scores.
With this in mind, and in an attempt to further understand how a short sale impact credit scores, the effect generally will not be that noticeable for borrowers who have credit files that include missed payments or extremely heavy debts. A negative impact though may be more obvious for borrowers that have no delinquencies, relatively lower debt levels, and lacking derogatory items.
Foreclosure Sale against Short Sale Impact
In the context of wanting to know how a short sale can impact credit scores, it is vital to realize that credit implications can vary significantly for those who opt to sell voluntarily against those opting for a short sale. With short sale, it is understandable that not the entire outstanding debt will be covered.
If the borrower decides to take out a new loan to cover the deficiency, then the impact on the credit history is virtually the same as that of taking out a new loan. There is a possibility that taking out a new loan will be able to improve the credit history of the borrower. Without undergoing the short sale option, the borrower may find it difficult to acquire a new loan because of the outstanding financial obligation.
There is a huge possibility that the credit score of the borrower would be at the same level as it was before the short sale option came into effect. A sale forced by a foreclosure on the other hand will provide a severe negative impact on the credit score of the borrower.
Asking the question of how a short sale impact credit history is a legitimate concern among homeowners, especially when you take into consideration the volatile housing market. There is no question that in an economy where credit scores have immense bearing, being aware of how a short sale can impact credit history should always be taken into consideration.
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