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How Does Credit Bureau Reporting for Short Sales Work

For those having trouble making their mortgage payments, a short sale is an attractive option.  A short sale allows homeowners a chance to sell their home for less than the amount owed to their lender with some or all of the remaining debt being forgiven.

A short sale can very often be a financially sound alternative to bankruptcy or foreclosure, but many considering a short sale are unsure of how their credit score will be affected.  While this fear is understandable it is not one that should stand in a person’s way of completing a short sale.      

While a short sale can offer quick financial relief it will almost always result in a lower credit score, but the amount that a person’s credit score drops will vary based on different factors.

One factor that affects credit bureau reporting for short sales is the amount of time that a loan was in default prior to the close of the short sale.  Homeowners lucky enough to close a short sale prior to missing any payments will not see as large of a hit to their credit score as homeowners who allowed their loans to fall into default prior to closing.  The longer the default the more of an impact to the credit score. 

After a short sale a homeowner may have questions about how the short sale will affect future loans and homeownership.  As a general rule, short sales do not have any derogatory marks associated with them like foreclosures or bankruptcy.  In fact, the amount of time that a person will have to wait before being approved for a home loan after a short sale will be much lower than after a bankruptcy or foreclosure.  Major mortgage investor Fannie Mae allows borrowers to request home loans after two years from a short sale, compared to the five to seven year wait involved after a foreclosure.  

Homeowners putting off the idea of a short sale in order to protect their credit score shouldn’t.  At this point in the game, anyone considering a short sale is probably at a point in their life where their credit score is already slowly slipping out of their control.  Credit scores can always be repaired, but that process is difficult to begin without some relief from troublesome bills, like a high mortgage.  Volunteering for a short sale and taking the hit to the credit score is usually much better than being forced into foreclosure or bankruptcy, which can carry much heavier credit score consequences.

Another benefit to opting for a short sale is that lending institution loan applications don’t generally inquire about short sales in a person’s past, but they do inquire about bankruptcies and foreclosures.  Opting for a short sale is a great way to make the process of requesting a loan in the future a much easier process.  

Credit bureau reporting for short sales usually displays a short sale as something to the effect of “settled”, “settled less than owed”, etc.  In most cases the words “short sale”, unlike the words “bankruptcy” and “foreclosure”, don’t actually appear on a person’s credit score.