Short Sale: Not as Scary as It Sounds for Your Credit

Alright, so you're in a tough spot with your mortgage. Maybe you've lost your job, had some unexpected expenses, or the value of your home has just tanked. Whatever the reason, you're underwater, owing more than your house is worth, and struggling to keep up with payments. Foreclosure might seem like the only way out, but hold on a sec! Have you thought about a short sale? It might actually be a better option for your credit. As you read this, understand that this is not legal or financial advice. You should consult an attorney and a CPA for your options. I can refer you to both.

What's a Short Sale Anyway?

Basically, a short sale is when you sell your home for less than what you owe on your mortgage. The bank has to agree to it, because they're the ones taking the loss. It's not ideal, but in some situations, it can be a way to avoid an even bigger hit to your credit.

Short Sale vs. Foreclosure: The Credit Score Showdown

Okay, let's be real: a short sale will impact your credit score. You're not paying back the full amount you borrowed, and that's going to leave a mark. Expect your credit score to drop. The higher your score was to begin with, the more it might drop.

But here's the thing: a foreclosure is usually worse. A foreclosure can drop your score by more. Plus, a foreclosure stays on your credit report as a derogatory mark for up to seven years. With a short sale, you might be able to bounce back a little faster.

Think of it this way: with a short sale, you're at least trying to take responsibility and work with the bank. With a foreclosure, it's like you've just given up, and that looks worse to future lenders.

Why a Short Sale Might Be Better

• Less Damage: While both hurt, short sales generally ding your credit score less than a foreclosure.
• Faster Recovery: You might be able to qualify for a new mortgage sooner after a short sale compared to a foreclosure. This could be as little as two years, especially if you kept up with your mortgage payments until the short sale went through.
• Avoid Deficiency Judgement: In some states, the lender can come after you for the difference between what you owed and what the house sold for (called a deficiency judgment). A short sale might help you avoid this.
• Negotiate Terms: You may be able to negotiate with the lender to forgive the remaining debt, relieving you of further financial burden.

How to Help Your Credit After a Short Sale

So, you've done a short sale, and now you're wondering how to fix your credit. Here's the lowdown:

• Check Your Credit Report: Get a copy of your credit report from AnnualCreditReport.com and make sure everything is accurate. Dispute any errors.
• Pay Your Bills on Time: This is huge! Payment history is the biggest factor in your credit score. Set up autopay or reminders.
• Reduce Debt: Keep your credit card balances low.
• Consider a Secured Credit Card: If your score is really low, a secured card can help you rebuild.
• Be Patient: It takes time to rebuild credit. Don't get discouraged!

Other Options

A short sale isn't the only alternative to foreclosure. You might also consider:

• Loan Modification: Working with your lender to change the terms of your loan.
• Deed in Lieu of Foreclosure: Giving the house back to the bank.
• Refinancing: Getting a new loan to pay off the old one.
• Forbearance: Temporarily suspending or reducing your payments.

The Bottom Line

A short sale isn't a walk in the park, but it could be a better option than foreclosure for your credit. Consult a financial advisor, attorney or CPA. If a short sale is right for you, I'll get it handled.