How Does a Short Sale Affect a Credit Report?
If you proceed with a short sale, it can be damaging to your credit report. A short sale is when you and your lender or mortgage holder agree to accept a payment in full on your mortgage loan that is less than what is owed. Lenders may agree to this because it could save them the expense of having to foreclose later. Most borrowers looking to do a short sale have limited equity because the value of the home is less than what is owed.
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Credit Score
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If you decide to do a short sale, your credit score could be reduced by as much as 80 points. This can be devastating to your credit file, depending on what your score was previously. When your credit score is reduced, it increases the likelihood that you will have to pay a higher rate of interest for credit products such as mortgages and credit cards.
Universal Default
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Credit card companies review your credit report periodically to see if your financial situation has changed since they first approved you for credit. Your credit card limits could be reduced when a credit card company discovers you have a delinquency with your mortgage. This is called the universal default clause. A reduced credit limit will reduce your available credit and lower your credit score further. Some credit card companies will close your account altogether.
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Settlement
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When a short sale is completed, it could show up on your credit file as a settled debt. This can also be detrimental to your credit score and lower it as well. A debt settlement as well as other derogatory information can remain on your credit file for seven years. As time passes, a short sale or debt settlement will have less and less of a negative impact on your credit file.
Judgment
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Once a short sale is completed, there could be a balance remaining and your lender may require you to pay it. If you decide not to pay, the lender could pursue legal action and get a deficiency judgment. A judgment will further drop your credit score, but the amount will vary from consumer to consumer. All other information on your file will determine the exact amount of the decrease in your credit score.
Balance
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If borrowers have the ability to pay the remaining balance after a short sale, they will not see any additional change in their credit score from the short sale. When debtors have money in the bank or have the ability to take out a loan to pay a balance, this will work in their favor and keep the derogatory information off their credit file.
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