You may not be aware of what happens to your credit rating if you short sell your home, but then again, most people are in a similar situation. Even though this type of sale has become more common due to the financial and real estate crisis that the U.S. is just beginning to get out of, most people are not aware of the effects that a short sale can have on their credit score or rating. Before you decide that this is something that you want to do, you should become well-informed about the possible repercussions.
First of all, the impact of short selling your property on your credit rating is not as negative as a foreclosure. In addition, it is much more expensive and time consuming for a mortgage lender to have to foreclose on your home.
Hence, if it can be avoided and the loss is seen as less than what would be lost through foreclosure, then you may be able to talk your lender into allowing you to short sell the property. However, the first step in the process is to get the lender to agree to allow you to do the short sale, which is not an easy task.
If you manage to get the lender to agree, and you manage to get the short sale done, then its impact on your credit rating will depend on whether you are able to pay the deficiency balance. If you have the financial resources to pay the deficiency balance, then your credit rating should not suffer any negative consequences because you will have canceled your debt.
However, if you cannot cancel the deficiency balance, then your creditors will probably file judgment against you to try to collect all or part of what is still owed to them. If you should end up in this situation after short selling, then the judgment information will end up on your credit report, and it will also negatively impact your credit rating. This information will remain on your credit file for seven years after it was reported, and this type of proceeding makes it much more difficult to get credit from other lenders.
Generally, a foreclosure will lower your credit rating or credit score or FICO score, all three terms are used interchangeably, by 250 points. On the other hand, the short sale will drop your score by 75 to 100 points, which leaves you in a much better position when it comes time to try to raise your credit score in order to qualify for good loan terms.
If your credit score is around 750, and the short sale drops it to 650, you will have to raise your score by 70 points to once again qualify for good terms on a mortgage loan. On the other hand, a foreclosure will leave you at 500, and you will have to come up 220 points to qualify for the best loan terms. Therefore, if you can get your lender to agree, then it is much better to do the short sale than to go through foreclosure.
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