You already know that missing mortgage payments will damage your credit. But what are you going to do about those missed payments? If you choose to do a short sale on your home, you should know what you’re getting into, and how it will affect your credit score.
What is a short sale?
A short sale is an agreement between the borrower and the lender to sell a home for less than what is owed on the mortgage. For example, you may owe $100,000 on the mortgage, but you and the lender agree to sell the home for $80,000. The lender will lose money, but it’s a better outcome than a foreclosure, where they’d lose a lot more.
How does a short sale affect my credit?
Anytime you pay less than originally agreed on a loan, it will negatively impact your credit score. In most cases, a short sale shows up as “settled” on your credit report, which means that you reached an agreement to repay only a portion of the total debt – the rest is written off as a loss by the lender.
How badly a short sale will affect your credit score depends on what your credit was to start with. The impact of a short sale on the credit rating of someone with no history of missed payments can be quite severe. Fair Isaac, the organization that developed FICO scores, estimates that the average number of points lost from a short sale range between 85-160. Losing these points all at once can be a big hit to your credit score.
However, if you’ve missed mortgage payments, the impact of a short sale on your credit score will be less because that negative history will already have impacted your credit score, and your overall score will be lower to start.
Talk to your real estate agent about short sales and what they can mean to your credit rating. If you don’t already have an agent, watch the video to see how Sundaybell can help you find the real estate agent who’s exactly right for you.
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