How Long a Short Sale Affects Your Credit
Explore the long-term implications of a real estate short sale on your financial standing and credit profile.
A short sale occurs in real estate when a property is sold for less than the amount owed on the mortgage, and the lender agrees to accept this reduced payoff. This transaction allows a homeowner to sell their property and avoid foreclosure, which can be a more severe negative event on a credit report. The lender’s agreement to a short sale is typically contingent on the homeowner demonstrating financial hardship.
How Long a Short Sale Appears on a Credit Report
A short sale, like other significant derogatory marks, typically remains on a credit report for up to seven years. This duration is governed by the Fair Credit Reporting Act (FCRA), a federal law that dictates how long negative information can be reported by credit bureaus.
The seven-year period generally begins from the date of the original delinquency that led to the short sale. For instance, if a homeowner missed mortgage payments before the short sale, the clock starts from the first missed payment date that was never brought current. However, if a homeowner was current on payments up until the short sale, the seven-year period typically begins from the date the account was marked as settled or paid for less than the full amount.
How a Short Sale Affects Credit Scores
A short sale can have an immediate and significant impact on an individual’s credit score. The exact drop in score varies widely, largely depending on the individual’s credit history before the short sale. Someone with an excellent credit score, for example, might experience a larger point drop, potentially 150 points or more, compared to someone who already has a lower score.
Credit scoring models, such as FICO and VantageScore, view a short sale as a serious derogatory event because it indicates a failure to repay a debt as originally agreed. Several factors contribute to the severity of the score reduction. The number of missed payments leading up to the short sale, the total amount of debt involved, and the presence of other negative items on the credit report can all intensify the score drop.
Credit Report Designations for Short Sales
A short sale does not have a specific “short sale” designation on a credit report. Instead, it is typically reported using terminology that reflects the outcome of the mortgage obligation. Common designations include “settled for less than the full amount,” “pre-foreclosure,” or “deed in lieu of foreclosure.”
The specific label used can depend on the lender’s reporting practices and the nuances of the transaction. While a short sale is generally considered less damaging than a full foreclosure or bankruptcy, these designations still signal to future lenders that a debt was not fully repaid, which can influence future lending decisions. It is important for individuals to review their credit reports after a short sale to ensure the information is accurately reported.
Factors Influencing Credit Recovery
The recovery of a credit score after a short sale is a gradual process influenced by several factors. Time is a significant component, as the negative impact of a short sale naturally lessens over the seven-year reporting period. The older the derogatory mark becomes, the less weight it carries in credit scoring models.
New positive credit activity plays a substantial role in improving a credit score. Consistently making on-time payments on other accounts, such as credit cards or personal loans, demonstrates responsible financial behavior. Maintaining a low credit utilization ratio, which is the amount of credit used compared to the total available credit, also contributes positively to score improvement. Avoiding any new derogatory marks is also important to prevent further setbacks to credit recovery.