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Short Sale Information

Short Sale Articles

Short Sale Implications for Tax and Credit

One of the most important questions to ask before doing a short sale is what it will do to your credit. In an increasingly credit-dependent world, your credit report dictates everything from the rates you get to the type of home you’re able to buy. When you run into trouble, take time to think about short sale implications on credit before agreeing to your lender’s terms. To help you make the right decisions, here’s a quick guide to short sale credit implications and how you can minimize the damage.

Reporting Short Sales

A short sale will appear on public record for a while, typically from five to seven years, although exactly what it says depends on your lender. Some lenders report your mortgage as paid-settled, which is the least negative of all short sale credit implications. Others will report it as unrated, which has a more or less similar effect. If you were already at risk of foreclosure when you closed the sale, it will most likely appear as a “pre-foreclosure in redemption,” which is viewed more negatively by future lenders.

Credit Score Short Sale Effects

This is perhaps one of the most drastic short sale credit implications. On average, short sales will reduce your score by around 200 points, but it can range from 30 to 300. However, by themselves, short sale implications on credit make up only a small part of the deduction. What plays the biggest role in the point drop is usually the missed payments rather than the short sale itself—if you were already 60 days behind during the sale, your score drops by up to 110 points in addition.

Future Loans

Of course, the reason borrowers are concerned about short sale implications is that it affects how soon after the short sale they can invest in a new home. Under the FHA, one must wait at least two years before applying for a new mortgage. For other loans, while you can apply for a mortgage immediately afterwards, the short sale credit implications may keep you from getting reasonable interest rates. The best thing to do is wait until your score has recovered enough to merit comfortable mortgage terms.

How to Reduce Short Sale Credit Implications

Before starting the short sale process, do what you can to raise your credit score. Set your target so that even after the projected damage (say 200 points), your score will still meet the minimum required for a mortgage. Most lenders accept scores of 650, so by bringing your score as close as possible to 850, you can reduce the time it takes for short sale implications on credit to clear out.