Did you know approximately 8.7 million homeowners chose short sales – selling their homes for less than what was owed on their mortgages from 2008 to 2018? Although short sales are less common in today’s booming Memphis housing market, they still may present themselves once again as an option instead of filing for foreclosure. But selling a home in a short sale does negatively impact credit, not to mention it will require some patience, strength, and luck to succeed.
If you’re considering selling your home in a short sale but have questions like: does a short sale ruin credit? Or can a short sale affect purchasing your next house? Below we’ll cover everything you need to know, so that way you can make the best decision for yourself and your family.
What is a Short Sale?
First things first, what is a short sale anyway? In a nutshell, a short sale is when you attempt to sell your house for less than you owe – that is if the lender agrees to that arrangement. If the property sells, the lender then pockets the proceeds. However, not all lenders will agree to a short sale in Memphis. Homeowners usually have to be 90 days past due or more on their mortgage payment for the lender to even consider this option.
Also, some lenders may not forgive the unpaid balance on the loan. Tennessee allows lenders to seek deficiency judgments that require the person to repay the difference between the final sale price and the balance remaining on the mortgage.
After the short sale, the lender will report it to the three major credit bureaus as a charge off, a deed-in-lieu of foreclosure, a settlement, or a loan settled for less than the amount owed. The way the short sale is reported by the lender can also have a significant impact, potentially damaging your credit score.
Furthermore, any late mortgage payments you made prior to the sale will also undermine your score. Finally, if the lender is granted a deficiency judgment to collect the balance owed on the mortgage, that will also damage your score. Even the amount of the deficiency can negatively impact your credit score.
Does a Short Sale Affect Your Credit Report?
Unfortunately, a short sale is among the worst things that can happen to your credit report. A short sale can drop your credit score by as much as 100-150 points, depending on your initial score. But usually, the higher your credit score, the more it will see a drop. What that specific amount is, though, depends on your credit history, the scoring system used, and the lender’s criteria- but ultimately, it will have a severe impact and not in a positive way.
Generally, credit scores range from 300 to 850. If your score is in the range of 750-800, it could potentially drop 150 points in a short sale, maybe even more. If you have a good or average score between 650-720 range, you could lose 100 points after a short sale, causing you to fall into the “subprime” category.
So why is this so important? A lower credit score can make future borrowing more difficult, if not impossible. Even if you are still eligible for loans or credit cards, your interest rate will climb as your credit score drops.
Related Article: Things To Consider to Selling an Upside Down House in Tennessee
When Are Short Sales Removed from a Credit Report?
Short sales, similar to foreclosures, can remain on your credit report for as long as seven years. But the good news with short sales is that your credit report is likely to begin improving more quickly, usually within two years. However, this depends on the credit score you started with and if you were late on your payments up until the short sale sold. However, there are some things you can do to speed up the process of healing your credit report.
How to Rebuild Credit After a Short Sale
Rebuilding credit takes time, but by continuing to make mortgage payments until the short sale closes, you may be able to rebound faster. Generally speaking, you should be able to obtain a mortgage for a new house in two years, possibly in less time if you continue paying the mortgage until your property is sold, as opposed to five to seven years after a foreclosure.
Another way to rebuild your credit after a short sale is to focus on your consumer credit. Make sure to keep your credit card balances low, and always pay your bills on time. Credit card debt can account for 30% of your credit score, so try to pay it down. If you don’t have revolving credit, try to open an account. Some lenders will issue a secured credit card, allowing you to make a deposit to secure your card against anything you buy. Also, paying statements on time will help you increase your creditworthiness. On-time payments reported on your accounts can help rebuild your credit by offsetting the negative impact caused by the short sale.
Can Short Sales Affect Purchasing Your Next Home?
The short answer is yes, a short sale can affect purchasing your next home. Usually, there is a waiting period between the short sale and buying your next home. But several factors play a role in how long that waiting period may be. One factor is the unpaid balance amount of your loan after you sold the home. Another is whether you were behind or late on any payments before the sale.
We touched on this earlier, but the payment issue is significant. It’s crucial to continue paying your mortgage until the short sale closes. If you were current on payments, you could qualify for a Federal Housing Administration (FHA) mortgage immediately after the deal is finalized. Fannie Mae, a government-chartered company that purchases mortgages that lenders write, also has a similar program. Unfortunately, not all lenders will lend you money after a short sale, so you need to investigate until you’re able to find one.
If you were delinquent on your payments before the home was sold in the short sale, most lenders would make you wait a minimum of two years before applying for another home loan.
Should You Short Sale Your House?
This decision is entirely up to you and your individual circumstances. If you can’t afford your mortgage payments or home values have dropped in your area, selling would be a better option than filing for foreclosure or bankruptcy. But keep in mind that a short sale can take several months. Generally, short sales are complicated transactions that end up being very time-consuming. Plus, the original lender will need to review the short sale offer to determine whether they will accept it or not. If the lender finds that they can make more money by going through the foreclosure process, they might not accept the short sale proposal.
To reduce time and impact on your credit score, why not consider selling the house on your own? You could have control of the home sale and which offer you’d like to accept. But if that hasn’t been an option for you because of all the work involved in getting your house ready to list or the hassle of finding a good real estate agent, well, you can easily sell to one of the companies that buy houses in Memphis instead.
Fair Cash Deal is a We Buy Houses Tennessee company that could make you a cash offer for your home within 24-hours and close in as little as 7-days. They don’t require repairs, will buy your house as-is, and they don’t charge expensive realtor commissions. Their home buying process is really easy and is a great way for you to sell your house fast without the negative impact of a short sale.
Fair Cash Deal is a family-owned real estate solutions company based out of Cordova, TN but has helped homeowners all over the Memphis area, including Southaven, MS. They are a BBB accredited business with an A+ rating and understand the pressure of selling a house. Contact them today to get more information about how selling a house for fast cash works.
When it comes to a short sale, it’s essential to carefully weigh your options when deciding what works best in your situation and then move forward with what you think is the best choice for you. Ultimately, as you’ve found out, a short sale can negatively affect your credit score, impact your next home purchase, and potentially involve paying a deficiency judgment. In which case, it would be wise to consider other options besides a short sale.
Selling your house to a cash home buyer like Fair Cash Deal would help you be able to move on quickly with your life without the negative impact of a short sale on your credit report. If you’re interested in getting a cash offer for your Memphis home, contact Fair Cash Deal today!