Short Selling and How it Affects Your Credit Score

Posted on August 13, 2009
Filed Under Selling | Leave a Comment

Short selling is the practice of selling an asset that is lent to one, with the intention of buying an identical asset with which to pay off the debt, potentially with a profit depending on market fluctuations. In the case of real estate, this is a practice to save some credit scores wherein the asset is a mortgaged house.

The current economic condition is rather poor, and so there are many who find themselves in danger of losing their homes due to the inability to pay monthly installments. In this case they may soon find themselves in a state of foreclosure, which can seriously hurt one's credit rating in addition to the loss of a place to stay. Short selling also affects credit ratings negatively, but not as bad as foreclosures, which is why people turn to it as a last resort.

Sadly, this cannot be done on one's decision alone. The consent of the lender, in this case the bank or financing company, is required for the sale to even be offered. Without the lender's consent, any sale of the asset would be illegal. Not all lenders are willing to allow short selling, since it is possible to lose a lot of money in doing so.

If one's lender agrees to short sell the house, then the property is to be sold at a value less than the owed amount. If it is sold, then the seller will have to face the problem of how it will affect his credit score. Still, it is less painful than it would have been if the mortgage was foreclosed.

To give you some perspective, a foreclosure can hit one's credit score for 200 to 300 points, which is gruesome. On the flip side, a short sale means that your credit score will drop by anything between 75 -125 points. This is pretty awful, but certainly not as bad as that for a foreclosure.

Another benefit is how it will affect your capability to own a home. A foreclosure will mean that you will not be able to buy a new home until after about five years. For short sales though, you still get a similar penalty, but only for about two years. This is quite obviously an improvement.

So what are the things that go into consideration when calculating your credit score penalties? Delinquent payments are those payments that are at least thirty days late. The more of these you have on your record, the worse damage you will take to your credit score.

Next is the amount of debt still unpaid. The larger this is, the more damage your credit score will take. In theory, short selling and then refinancing the remainder would mean that no damage in this category will be taken, but actuality can be different.

People have compared foreclosures and short sales to getting hit by a train or a bus. Either way, you come off worse for the wear, but one option much less painful than the other.

Short selling can help you avoid foreclosure, but it won't save your credit score totally. For more information on real estates, take a look at Pecan Creek Affordable Homes and Pointe Tapatio Scenic Homes.

Related Posts

Comments

Leave a Reply