Does a short sale hurt your credit? Selling a home in a short sale can provide a financial way out, especially if you owe more on your mortgage than your home’s current market value. However, it’s important to understand how a short sale can impact your credit and what you can do to protect it as much as possible. 

In this blog post, Houston Heights real estate expert Chris Schmidt will discuss if a short sale hurts your credit.

Key Takeaways:

• A short sale typically lowers your credit score by 100 to 150 points or more.
• Short sales stay on your credit report for up to 7 years, though they can impact your credit less severely than foreclosures.
• Working with your lender on how the short sale is reported to credit bureaus can help reduce the impact on your credit.

Does a Short Sale Hurt Your Credit?

A short sale occurs when you sell your home for less than the remaining mortgage balance, with the lender’s permission. For homeowners in the Houston Heights real estate market, a short sale can be a helpful option to avoid foreclosure and minimize the financial fallout of a tough market. However, a short sale leaves a significant mark on your credit.

According to top Houston Heights realtor Chris Schmidt,

“A short sale isn’t as damaging as a foreclosure, but it does have an impact. Your credit score will take a hit, and that’s something sellers should be prepared for.”

Typically, a short sale will reduce your credit score by 100 to 150 points or more, depending on where your score starts. For instance, a higher score generally experiences a bigger drop than one that was already lower. 

However, the credit drop is often less severe than with a foreclosure. This is particularly the case if you make efforts to minimize the damage by negotiating with your lender and maintaining your mortgage payments throughout the short sale process.

Short sales also remain on your credit report for up to seven years, much like a foreclosure. This can affect your ability to get future loans.

Short Sale vs. Foreclosure: Which Impacts Credit More?

While both short sales and foreclosures impact credit, short sales tend to be somewhat less damaging than foreclosures. With a foreclosure, you stop paying on your mortgage, which signals to lenders that you’ve completely defaulted on your loan. In a short sale, you’re at least partially repaying the debt, which shows some willingness to meet financial obligations.

Chris Schmidt says,

“Short sales look better than foreclosures because, with a short sale, you’re taking action rather than abandoning the property. Lenders look favorably on that.”

This perception can help lessen the impact on your credit score, especially if you continue making payments until the short sale closes. If you’re able to do so, it can support a faster credit recovery than you’d see with a foreclosure.

How Lenders Report the Short Sale Matters

One important factor in how much a short sale affects your credit is how it’s reported to the credit bureaus. The terminology used can vary widely, but common options include:

• “Settled for less than the full amount due”
• “Charge off”
• “Settlement”

In rare cases, a short sale might even be reported as “paid” if you and the lender can agree on that. However, this outcome is challenging to secure and requires a high level of negotiation.

If you have any influence over how the short sale is reported, opt for the most favorable terms possible. A “settled” or “paid” status tends to hurt your credit less than a status that says “charge off” or “deed-in-lieu of foreclosure.”

As Chris Schmidt explains,

“Every lender and case is unique, but in many situations, working with your lender to see if you can get favorable reporting terms can make a big difference in the long run.”

How Long Do You Have to Wait Before Buying a Home?

After a short sale, most lenders require you to go through a waiting period before they approve a new mortgage. Typically, this is two to three years, while with a foreclosure, it’s more likely to be five to seven years.

This shorter waiting period is one reason many homeowners in the Houston Heights area consider short sales when facing financial difficulties. This way, they don’t completely forfeit their future home-buying potential.

It’s important to note that FHA, VA, and conventional loans have varying waiting periods after a short sale. Many lenders are open to working with former short-sellers within a couple of years, especially if they’ve shown consistent on-time payments post-short sale. 

Tips to Minimize Credit Impact in a Short Sale

If you’re considering a short sale, there are steps you can take to minimize the negative effects on your credit score:

• Continue Making Payments if Possible: If you’re able to make mortgage payments leading up to the short sale, it can show lenders that you are still committed to repaying the debt. This can help lessen the impact on your credit.
• Negotiate with Your Lender: Work with your lender to agree on favorable terms for how the short sale is reported to credit bureaus. Getting it reported as “paid” or “settled” can help prevent severe damage.
• Start Rebuilding Credit Right Away: After the short sale, focus on rebuilding your credit. Make on-time payments on all other accounts, use credit responsibly, and avoid opening too many new lines of credit. Many people see their credit start to recover in about two years with responsible credit habits.
• Seek Professional Advice: A real estate expert familiar with Houston Heights, like Chris Schmidt, can provide insight and resources to help you navigate the short-selling process smoothly, from negotiating with lenders to understanding the full impact on your finances.

Can You Rebuild Your Credit After a Short Sale?

Rebuilding credit after a short sale is absolutely possible. While the short sale will remain on your credit report for up to seven years, most people can start seeing improvements within two years if they practice good credit habits. Focus on paying down other debts, making all payments on time, and avoiding excessive credit use.

Credit repair isn’t instant, but with patience and effort, you can see your score rise steadily. This approach is especially helpful for home sellers in Houston Heights looking to re-enter the market in the future.

Is a Short Sale the Right Choice for You?

Choosing a short sale can be a good option to avoid foreclosure and its heavier impact on credit. For many sellers in Houston Heights, this solution offers a way to meet financial obligations, mitigate credit damage, and keep home-buying options open for the future. While a short sale does affect your credit, the impact is often less severe than a foreclosure, especially with a proactive approach.

As Chris Schmidt notes,

“A short sale can be a smart way to preserve some of your credit standing while managing a tough financial situation. It’s not a perfect solution, but it’s often the best option for those who need to sell fast.”

Selling Your Houston House is Easy with Chris Schmidt

If you need to sell your home in a short sale, you’ll need to work with a real estate professional. At Your Home Sold Guaranteed Realty - Chris Schmidt Team, Chris Schmidt and our team of expert realtors have the knowledge and experience necessary to help Houston home sellers.

We’ve developed a reputation as the best realtor in Houston for a reason– on average, we sell homes seven times faster and for 2.5% more. Home sellers also love working with us because of our dedication to delivering top-quality customer service, as well as our unique Guaranteed Sale Program.

To learn more about the short-selling process or to get started on your real estate journey, give us a call at 713-322-5604. You can also fill out the form on this page or send a message to [javascript protected email address].

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