A Short Sale’s Effect on Credit
A short sale of a house takes place when a borrower’s mortgage loan exceeds to the actual value of his house and due to this he finds it hard to make monthly payments on a regular basis. For the short sale process to succeed, the lender’s approval is a must because he is the main party of the loan agreement. He often agrees to accept short sales provided the borrower furnishes evidence of his financial hardship proving that he can no longer endure the mortgage loan.
To learn how a Texas short sale impacts one’s credit needs to be preceded by a brief introduction to what a credit score is and how credit bureaus calculate it.
What is a Credit Score?
Equifax, Experian, and TransUnion are the three major credit bureaus that collect information about loan dealings taking place between lenders and borrowers. They keep a track record of how lenders pay their credit back, whether they are regular in repayment or delinquent. Then credit reports of borrowers are compiled on the basis of this information which helps them to calculate their credit scores.
The credit score calculation formula given by the Fair Isaac Corporation (FICO) is most commonly used. A recent report issued by this corporation shows how credit scores go down under various circumstances. The average credit loss recorded by FICO is as follows:
Bankruptcy =130 to 230 Points
Foreclosure = 85-160 Points
Short Sale = 85-160 Points
Deed-in-lieu = 85-160 Points
30 Days Late = 40 to 110 Points
90 Days Late = 70 to 135 Points
Impact of Short Sale on Credit Score
The above ratings manifest no difference between a short sale and foreclosure with both bringing about the loss of 160 points each. However, it is also to be noted that this serious delinquency will come into effect given that a borrower is in default for a minimum period of 60 days.
So it is clear now that the impact of the short sale process on credit history is mainly dependent upon the degree of your delinquency at the time of the short. If you are delinquent on your mortgage payments for sixty days, then your credit scores will suffer the same loss as it suffered in case of foreclosure. However, if you have been paying your mortgage payments on time, you will suffer less credit loss as compared to that of foreclosure. Additionally, because foreclosures commonly drag on for more than a year while the average short sale lasts six months, one year worth of late payments is much more damaging to one’s credit that six months’ worth.
The complicate issue here is that lenders don’t have uniform standards with regard to reporting a short sale to the credit bureaus. Generally, their report goes with remarks “settled as agreed.” Some lenders have also been noted to have reported as “account was legally paid in full for less than the outstanding balance.” Again this report depends on the extent of your being delinquent on your mortgage payments. With regular payments you can protect your report to a larger extent in comparison with a delinquency of over sixty days.
Purchasing A New Home
As per Fannie Mae guidelines, if you are a short seller, you will have to wait two years to becoming eligible for purchasing new home. On the other hand, if your house is foreclosed, you will have to wait for a period of five years prior to purchasing new home. Hence short sale appears to have an advantage over foreclosure.
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