There are many reasons you may be having a hard time paying your mortgage and it’s certainly stressful to be in a position where you may lose your home. You do have options available to ease your financial burden, including a short sale of your property. But if you don’t take action, the lender may foreclose upon your home. Both short sales and foreclosures will impact your credit score, so it’s important to understand the implications.
The Impact of a Short Sale on Credit Ratings: A short sale is a transaction where the borrower requests that the mortgage lender accept a loan repayment for less than the full amount. In most cases, you’ll have to provide proof of a financial hardship that impacts your ability to pay or that you’re being forced to relocate for your job. Your credit rating after a short sale will be affected, but the full impact depends on how the matter is reported to the credit bureaus once the transaction is completed.
Your lender can report the short sale to credit bureaus either as fully paid or settled for less than the full amount. Most will opt for settled to indicate that you didn’t pay off the full amount, though some will report that the mortgage was paid. While it’s unlikely that a lender will agree to this, your credit score isn’t as negatively impacted.
How a Foreclosure Affects Your Credit Score: The impact of a foreclosure on credit scores is considerable and it’s difficult to estimate exactly how much your rating will suffer from the proceedings. You can expect your score to dip at least 100 points, probably in the range of a 200-point drop. There are a number of ways this can affect your future.
- Your Ability to Obtain Credit: You may have a difficult time applying for a car loan, a credit card or other type of credit account.
- Your Interest Rate for Future Loans: Even if you are able to apply for credit or obtain a loan, you’ll likely be paying a higher interest rate on the balance.
- Employment Opportunities: More employers have begun to run a credit report as a condition of employment, believing that a credit history is an indication of the trustworthiness and reliability of the candidate. You may be turned down for a job if a foreclosure appears on the report.
- Living Accommodations: You’ll be looking for new living arrangements after the foreclosure process is complete and you may choose to rent a space. Most landlords will run a credit check before granting you a lease, so you may have difficulty finding a place to live.
Rebuilding Credit & Your Future Creditworthiness: For both short sales and foreclosures, the negative history continues to appear on your credit report for seven years. However, you can be building your credit during this time by making on time payments for utilities and obtaining a secured credit card – which you pay in full every month.
You can see that a short sale may be a better option if you can’t pay your mortgage and want to avoid the negative consequences of foreclosure. However, a short sale may not be feasible, leading the lender to initiate foreclosure proceedings. Understanding how each impacts your credit score can help you prepare for a brighter financial future.