How Long a Short Sale Stays on Your Credit Report and How Bad It Hurts It

Let’s start with a short video from our general short sale guide explaining how a short sale affects the credit.

Before deciding to do a short sale, it is highly advised that the seller contacts a licensed credit professional to discuss the potential implications.

Let’s debunk the myth that a short sale has zero effect on your credit.

Despite what many people believe or choose to sell to the public, a short sale negatively affects your credit after you successfully complete the transaction.

However, your credit is far from “ruined” or diminished. In fact, the negative drop in credit score from a short sale is far less than the results from a foreclosure process. So, to answer the question above, a short sale hurts your credit score, but does not completely ruin it.

The exact decrease in points will depend on how high or low your score is before the short sale.

For example, if your score was in the 750-850 range, a drop of around 120-150 points may be likely. However, if your credit score was in the 650-700 range, you may experience a decrease of around 60-100 points.

To put an exact figure on it is impossible and can only be determined on a case-by-case basis.

However, using the “high-low” principle above will allow you to enter into the short sale with a good base of knowledge and understanding of the risks.

Here is another video from the guide mentioned above.

A short sale can stay on your credit for an estimated three to seven years. The range will depend on numerous factors, including your immediate action steps, whether or not you seek help from a credit professional, and your current debt-to-income ratio.

Regarding being able to purchase another property, you may be able to do so afterwards. The type of loan you’d like to get after the short sale will determine the amount of time you’ll have to wait.

Some FHA loan products will allow you to get a loan two to four years after the short sale. In these situations, you’ll be required to write an explanation letter to the mortgage lender, describing the reason for your late payments.

If you can do a good job of proving that it was a short-term financial hardship, the mortgage lender will likely grant you the loan.

Some common examples of short-term hardship can be job loss, temporary illness, divorce, and other types of happenings in which you can convey to the bank that it was a minor slip-up and you have now gotten past it.

Once a short sale is completed, the next thing that will likely be on your mind is to remove it from your credit report ASAP!

Unfortunately, no magic “credit” wand exists. You’ll have to rely on good old-fashioned persistence and hard work.

You may start by researching reputable credit repair agencies. If possible, narrow it down to at least 3.

Then, you’ll want to call the companies and interview them in order to determine which is a good fit, trustworthy, and affordable.

While removing the blotch on your credit report overnight won’t be possible, you can still get it done quickly, by being proactive in hiring a credit repair company and staying consistent with your efforts of eliminating the item.

Another option is doing all the credit repair work yourself or with the help of a non-profit credit counseling agency. This includes sending requests to your lender to confirm information, disputing errors in your credit history, and other similar actions.

Reviewing lender reports from three major credit bureaus (i.e., Equifax, Experian, and TransUnion) every year is advisable after a short sale.

As mentioned above, some FHA loans can be given to you in just two to four years after a short sale. However, buying a home after a short sale is a big decision. So, it’s important to know what other factors to consider.

After a short sale, the longer you wait to buy a home, the better. Here’s why.

As time passes and you stay proactive and persistent in rectifying your credit, the likelihood of becoming a “good” borrower in the lender’s eyes increases.

You’ll have more time to save up money for a down payment, as well as prove to the lender that what happened in the past was a short-term hiccup.

If you should choose to purchase a property soon after the short sale, this can be possible, depending on the loan type. As mentioned above, certain lenders and loan products will grant you the right to purchase again, given the conditions.

However, you must be aware that if you are going to attempt to buy a house in the immediate aftermath of performing a short sale, the lender may consider you to be a high-risk borrower.

Being a risky borrower likely means higher interest rates, as well as other unfavorable loan terms.

You can improve the odds of buying a house after a sale by rebuilding other aspects of creditworthiness. For example, maintaining a low credit utilization ratio or credit card balances can be helpful.

Refinancing your mortgage when you’re in default is not possible. Lenders have strict rules against this. Your mortgage must be in good standing in order to do a refinance. In addition, you must have equity in your home.

Refinancing after a short sale is a different story. This situation follows the same principles as purchasing a property and getting a loan. Let’s take a look at this example:

You sold your property a few years back through a short sale. After purchasing a new home, you have a bunch of equity, interest rates are low, and you would like to refinance.

In order to refinance, the lender will review your current mortgage payment history, as well as review the details of your past hardship.

If your main goal is to sell the home in order to get out of your current situation, then it’s unlikely there is a better alternative to a short sale.

Filing for bankruptcy is an option, but a very time-consuming and expensive one. Most bankruptcy attorneys will demand a deposit payment up front, then another when it is filed.

Bankruptcy solves the short-term issue of the bank coming after you, but runs the risk of creating even bigger and longer-term damage to your credit report and dragging you deeper in debt.

A deed in lieu of foreclosure is an option only offered in certain situations by some lenders. Most lenders view these types of transactions as risky, due to the influx of lawsuits by borrowers against creditors.

If you’re lucky enough to have the lender offer this option, it may not be much better for your credit report than a foreclosure, and definitely worse than a short sale.

A loan modification will not solve your issue of selling the problem property. It is important to understand the multiple risks such as:

• There is no guarantee your payments will be lower or your terms improved
• A large majority of loan modification applications end up getting declined
• You assume the risk of being unable to pay the remaining loan balance if you get the lender’s approval

Foreclosure speaks for itself. Letting the bank take the property results in a massive hit to your credit, poor financial standing with future lenders, a lack of control, etc.

Therefore, in terms of credit damage in most cases, a short sale is the least risky and damaging option for the credit.

Note: If you are also interested in other articles about how a short sale works for the seller, you are welcome to read my other guides:

• A-to-Z Short Sale Guide for Homeowners
• Step-by-Step Short Sale Process for Home Sellers
• Short Sale vs Foreclosure vs Deed in Lieu
• What Does a Short Sale Negotiator Do for the Seller?
• How Does a Short Sale Affect Your Taxes?

Although a short sale is the best option in most situations, to enjoy all its benefits, it should be completed successfully, in the first place.

If not being processed correctly, the bank can foreclose during the short sale process. This is pretty bureaucratic and difficult for a regular realtor or a homeowner to complete efficiently.

In order to put yourself in the best situation possible, it is highly recommended that you find a short sale processor. There are processors whose services are completely free for the seller, because they get compensated by the buyer of the property.

If you are considering short selling your home with the free help of a reputable short sale processing company, fill out a short sale help form to get connected with a reliable professional in your location.

Short sale processors facilitate the entire short sale for you, from start to finish. This includes, but is not limited to:

• helping to complete documentation
• passing the mortgage assistance package back and forth
• gathering financial supporting documents
• being the direct contact for the lender, etc.

A good short sale processing company will help greatly by getting you from point A to point Z correctly and more efficiently. Processors are able to do this because they have specific systems in place that are designed to navigate the short sale process.

A realtor may also assure you that they are experienced in closing short sale transactions because they’ve had a few during their career.

But being “experienced” in short sale transactions simply is not good enough. You’ll need to be sure to work with someone who designed their entire business around processing short sales.