In golf, the lower your score, the better. In bowling, a perfect score is a 300. When it comes to credit, the scores have to get much higher before you can win the game. Your credit score is the number that dictates your credit worthiness on a scale from 350 to 850, using a number of factors. Among them is your bill-paying promptness, your history of late payments and the credit card debt you’re carrying as compared to the card’s credit limit.
Your credit report contains additional information, such as the way your debts are handled. Some of the possibilities are: paid in full and on time or settled for less than the full amount. The report is important because it identifies areas where you’re financially vulnerable. In the case of a short sale, your vulnerability could be in a poorly-written settlement that leaves you liable for the difference between the mortgage balance and the settlement amount. That liability will appear in your credit report.
A short sale is a situation in which a lender agrees to close an outstanding mortgage for less then the full amount owed. This usually comes about because the real estate’s value has dropped below the balance due on the mortgage, and the property owner(s) can’t make regular payments. One of its effects, beyond the settlement terms, is its impact on your credit score and your credit report.
A short sale reduces your credit score by 100 to 200 points and credit scores after a short sale hover around the range of 420 to 520. People with high credit scores are particularly hard-hit when they go through a short sale, probably because a high score carries expectations of financial stability and responsibility. Most of the drop comes from the history of late payments and the short sale itself. A rule of thumb regarding points lost on your credit report is that you’ll get:
- An 85 to 160 point drop for a short sale.
- A 40 to 110 point drop if your mortgage payment is 30 days late.
- A 70 to 135 point drop if your mortgage payments are 90 days late.
Those who are forced into a short sale may worry about the impact on their credit, but the impact on your credit from a short sale versus a foreclosure makes the short sale a better choice. A buyer who is current (has no late payments) can qualify for a loan within two years after going through a short sale while it can take seven years or longer after a foreclosure. In the credit score game, a short sale is a better bet than a foreclosure every time.