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Shortsales and Credit Scores

Being late on payments can lead to a credit score reduction.Not only will there be credit implications to consider on a borrower’s credit report, but one of the most drastic short sale credit implications to consider is the effect it can have on a seller’s credit score. The actual amount a shortsale will reduce an individual’s credit score can vary from 30 points to 300 points. However, a reduction of 200 points is about average for this transaction.

Of course, the short sale itself is only part of the reduction a seller may see on their credit score. What actually can lead to the largest drop in a score are the payments that may have been missed, rather than the actual shortsale transaction. The late or missed payments can lead to an additional drop in a seller’s credit score, depending on the delinquency of the payments.

Being 30 days late on payments can lead to a credit score reduction ranging between 40-110 points. Payments that were 90 days late or later will result in a further deduction of 70 points to 135 points. Keep in mind, the reduction in score due to late or missed payments is added on to the reduction in score due to the actual short sale. With serious payment delinquencies, the short sale can lead to more than a 400 point credit score drop in extreme cases.

How a Shortsale Affects Future Loan Applications

Borrowers should also be concerned about the credit implications of short sales because this transaction can affect future loan applications. The time a homeowner must wait to invest in a new home will vary. Under FHA regulations, sellers will need to wait a minimum of two years before they can apply for another mortgage. However, other loans allow consumers to apply for a mortgage right after going through a short sale.

Of course, while individuals may be able to apply right away, the credit damage that occurs may make it nearly impossible to get reasonable rates on a new home mortgage. In most cases, it is best to wait until there has been a sufficient recovery in credit score before applying for a new mortgage. In this way, individuals have a better chance of being offered comfortable mortgage terms.

Next: Tips for reducing a short sale's impact to one's credit