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Selling your home in a short sale will negatively affect your credit score, but how much will depend on many factors. Your payment history, your ability to pay other debts, and the amount the lender forgave in your short sale will all play a part.
A short sale typically will reduce a borrower’s credit score anywhere from 50 to 200 points. In most cases, a short sale will show up as an entry on the borrower’s credit report as “Paid in full; settled for less than originally owed.”
However, damage to your credit score from a short sale is typically much less than from a foreclosure or bankruptcy. A bankruptcy or foreclosure can be seriously damaging to credit scores. For this reason, most borrowers consider a short sale to be a better alternative to filing for bankruptcy. Choosing a short sale instead of a foreclosure or bankruptcy is seen as a way to better preserve a borrower’s credit history.
Also, resolving the mortgage problem through a short sale may damage your credit a bit, but it can leave you as a borrower in a much better financial situation, allowing you to improve your credit by keeping up with other debts.
In standard home transactions, the seller and buyer reach an agreement for how the sales commission to a Realtor will be paid. Sometimes a buyer and seller will agree to split the costs out of escrow funds, or the seller may offer to pay the entire commission as an incentive for the buyer to purchase the property. The commission usually amounts to six percent of the sales price of the property.
However, in a short sale, the seller has no money in escrow to pay commissions, so the funds to pay a Realtor are paid from funds that would have gone to the lender, who ends up paying the entire sales commission.
A short sale of property may be the best option for curing your current housing problem, but it is not the only option. You may be able to arrange for a loan modification from your lender, where the interest rate, monthly payment, and other terms of your current loan are adjusted to lower the monthly payment and keep you in your home. Or, you may be able to refinance the loan with another lender.
Another possible alternative to a short sale is a deed in lieu of foreclosure. If you have made a good-faith effort to sell your property but have been unable to do so, your lender may consider this option. With a deed in lieu of foreclosure, the borrower voluntarily transfers ownership of the property to the lender. This is only allowed when the property being transferred is free of mortgages, liens, and encumbrances. When completed, the deed in lieu of foreclosure results in the property belonging to the lender, who may then sell it.
Other alternatives to a short sale may include bringing your loan balance to current by paying the entire amount past due or filing for bankruptcy.
This article is intended to be helpful and informative. But even common legal matters can become complex and stressful. A qualified real estate lawyer can address your particular legal needs, explain the law, and represent you in court. Take the first step now and contact a local real estate attorney to discuss your specific legal situation.