How does a short sale affect my credit score?

A short sale of a home can have significant consequences for your credit scores, although the impact is generally less severe than a foreclosure. Here's an assessment of the consequences of a short sale on your credit scores:

1. Credit Score Impact:

• A short sale involves selling your home for less than the remaining mortgage balance. While it's considered a more responsible option than foreclosure, it still typically results in a negative impact on your credit scores.

2. Credit Reporting:

• The short sale will be reported on your credit report. It will likely be categorized as a "settled" or "settled for less than the full amount" account, indicating that you didn't pay the full mortgage balance.

3. Duration on Credit Report:

• A short sale will typically remain on your credit report for seven years from the date of the sale. During this time, it can negatively affect your credit scores.

4. Credit Score Drop:

• The exact drop in your credit score due to a short sale can vary based on your credit history and the scoring model used. However, it's not uncommon for credit scores to drop by around 100 to 150 points or more.

5. Future Lending Impact:

• While a short sale is less damaging than a foreclosure, it can still make it more challenging to obtain new credit, including mortgages, loans, and credit cards, for a period after the event. Lenders may view you as a higher risk.

6. Recovery Over Time:

• The negative impact of a short sale on your credit scores is most significant in the immediate aftermath. Over time, as the short sale ages on your credit report, its impact gradually lessens, especially if you manage your finances responsibly.

7. Rebuilding Credit:

• To mitigate the credit score consequences of a short sale, focus on rebuilding your credit. This includes making on-time payments on existing accounts, keeping credit card balances low, and avoiding further negative credit events.

8. Future Homeownership:

• After a short sale, you may be eligible to purchase a new home, but you may need to wait for a specified period, typically two to four years, depending on the lender and the type of mortgage you're seeking. The waiting period is often shorter than that of a foreclosure.

9. Consultation:

• If you're considering a short sale or have gone through one, it can be beneficial to consult with a financial advisor or credit counselor to develop a strategy for rebuilding your credit and managing your finances post-short sale.

In summary, a short sale can have negative consequences for your credit scores, but it's generally less damaging than a foreclosure. While it can make it more challenging to obtain new credit in the short term, responsible financial management and time can help you recover and rebuild your creditworthiness over the long term.