How many points will my credit drop for short salePosted On: November 2011
THE KREDIT KORNER WITH THE KREDITGURU, GARY NOVEL
Editor: Tiffany Brewington
Q: How many points will my credit score drop due to short sale, and how will it appear on my credit report?
A: This is one of the most common questions I hear nowadays, and it's important to understand what happens as there is a lot of misinformation out there. And it's NOT the end of the world.
The actual "short sale" transaction has a very small effect on your Credit Scores. Where all of the damage happens are the late payments that lead up to the actual short sale. This is basically the same as in a "foreclosure" situation.
For example, say your Score is 750 and you need to start the short sale progress. The Banks usually will not do anything until you start missing payments and show some type of hardship. You then go 30 days past due and lose 75 points; go 60 days late and lose another 20; go 90 days past due and lose another 20. So now you are 120 days late and have lost approximately 120-130 points. You will stay at that point until the short sale is completed, and then you will have lost approximately 140 points off of that 750 score you started with.
Once the short sale is completed, it will show up on your Credit Report as -0- balance and -0- past due, showing "account settled for less than the full amount". Those late dates will still be showing. Now your 750 score has dropped to about 600.
The important thing you have to due is keep making payments on all of your other good accounts, as this will cushion your fall in the amount of total points you will lose, and help you recover approximately 70% of the points you lose within the next 12 months. By simply keeping all of your accounts current, you will help your scores down the road.
Remember, the scoring program looks at your entire report to calculate your score, and that mortgage...no matter how bad...is just one piece of the big picture. The most common mistake people make is they figure that their scores are going to drop, so why should I keep up with all of my other accounts? Missing payments on your other accounts is the WORST thing that you can do, as by messing up your other accounts...you will lose more total points, and it will take you longer to recover the points once the short sale/foreclosure is completed.
You should NOT be concerned about your score if you are in a situation where a short sale is your only way out. No matter how bad it feels, you HAVE to do what you have to do to get yourself out of that situation, regardless as to how it drops your scores. I have seen people refuse to do a short sale because of how it hurts the scores. Then for the next 6 months they are digging for change in their furniture to keep making those mortgage payments, and then in 6 months you are broke,and in the same situation your were in 6 months earlier, and you have wasted paying them for 6 months.
One thing you have to keep in mind, is that as you get more and more late on the mortgage, your scores will be dropping...so it's possible that your credit card limits may be reduced. Unfortunately, there is not much you can do about that while the short sale is going on.
A short sale is not the end of the world, and yes you will take a major hit on your Credit Scores, but by doing things the right way, you can get that 750 score back in 2-3 years.
For all your credit-related questions, contact Gary Novel, President of Kreditguru, Inc at 630/624-9557 or firstname.lastname@example.org
Posted On: November 2011
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