Because both short selling and foreclosures fall under this general category, most lenders won't distinguish between the two and the two will stay on their credit reports for seven years. However, to what extent can a short sale affect credit? Data from Fair Isaac Corporation (FICO) shows that short selling can lower a consumer's credit score by 85 to 150 points, depending on where their credit started. In the case of short selling, the impact is more significant when there is a balance of deficiencies. Often, a short sale is a way for a struggling homeowner to avoid foreclosure, which can have more serious financial implications.
Both a foreclosure and a short sale can harm your credit, but the latter may be less harmful. Still, if you're wondering how long a short sale stays on your credit report, the answer is seven years, which could affect your ability to get a loan in the future. Whatever the immediate effect of the negotiated agreement, a short sale will affect your credit report for seven years. However, the impact of short selling will be less with each passing year, as recent credit actions have a greater impact on your credit score than past events.
The lender will report the short sale to the credit reporting agencies, who will show the transaction as an unpaid and uncollected debt. This will affect the short seller's credit rating, unless the deficit is paid or otherwise resolved. While short selling doesn't have the same effect as bankruptcy or foreclosure, they still represent a negative credit return that future lenders will consider if the short seller attempts to obtain another mortgage. Kahan points out that a short sale can lower your credit score by 50 to 200 points, which can put many loans out of reach.
Since short sales are not accompanied by the typical disclosures of a normal home sale, it is up to the prospective buyer to inspect the property and identify any faults. Holders of this certification have specialized training in short selling and foreclosures, qualify sellers for short selling, negotiate with lenders, and protect buyers. A short sale will appear on your credit report, but you may miss it if you don't know what to look for. While a foreclosure basically allows you to leave your home, albeit with serious consequences for your financial future, such as having to file for bankruptcy and destroying your credit, completing a short sale is labor intensive.
A short sale or foreclosure are two possible outcomes for homeowners who are behind on their mortgage payment, own a home that is under water, or both. It can take weeks or months for a lender to approve a short sale, and many buyers who submit an offer end up canceling because the process takes too long. Late mortgage payments could cause a double blow to your credit score, affecting it long before a short sale or foreclosure occurs. At one point, the Internal Revenue Service, as well as the State of California, considered as taxable income all debts canceled as a result of a short sale.
In addition, if the bank believes that a foreclosure proceeding is a more lucrative option, it can refuse short selling and instead go ahead with foreclosure. According to Tony Wahl, chief operating officer of the online credit analysis platform Credit Sesame, short selling (as well as foreclosures) should be considered “a last resort”. A short sale is usually a sign of a struggling homeowner who needs to sell the property before the lender seizes it in foreclosure. The lender, usually a bank, requires the mortgage holder to submit documentation that explains why a short sale makes sense.
As with other major derogatory events, it can take a long time for your credit score to recover from a short sale. Agents who specialize in short selling can hold a Short Selling and Foreclosure Resource Certification (SFR), a designation offered by the National Association of Realtors (NAR). .