Tuesday, November 10, 2009

Sale Effect on your Credit Score

In real estate, a short sale is considered a gray area. For sure, it will give you a negative effect when it comes to your credit score. However, its effect is better than an effect of foreclosure. In dealing with a short sale, the important thing is that you make sure to pay your monthly dues on time. Any delayed payments will appear on your credit score and will get your score to plunge down dramatically.

In a short sale, you will lose a 75-125 FICO point from your credit score. If you previously have a 750 credit score, after short sale, it will go down as much as 400 to 500. Your credit report will also show the sale as a ‘pre-foreclosure in redemption. In FICO scoring, three major credit events will be affected such as derogatory public record, serious delinquency and collection filed.

When it comes to a purchase of a new home, a short sale is shorter than that of a foreclosure. A foreclosure record remains as long as ten years, while in a short sale, it will take you about two years to e able to get a new mortgage loan, depending on your credit report and the status of your other account payments. It will take a considerable time to get your scored back on the track for you to be able to earn the confidence once again of a mortgage lender.

When you deal with your mortgage lender or a bank, it is important to establish an agreement with them, otherwise the report will appear as closed and loan not paid in full. This will further lower your credit score. It is best to consult your lawyer; he can help you negotiate with the mortgage lender or the bank on how the short sale is going to be reported to the credit reporting authorities. For tax purposes, check out how the short sale report appears to the IRS. Typically, money forgiven in a short sale will be considered as your income and you will be required to file an income tax for it. Your accountant will come in handy when it comes to tax matters. He will be able to help you structure the deal to minimize your tax dues.

Financially, a short sale can give you quite a difficult time. You must work hard on making positive credit activities to soar up your credit score. Repairing your credit score may get some time. If it is possible, you should avoid a short sale. In case you are faced with no other alternative, it is reassuring to know that your credit score will not suffer terribly compared to a foreclosure.

Consult your accountant or your lawyer to give you more ideas and information on the effects of a short sale on your credit score. Remember that a second chance is always possible as long as you are being honest with yourself and you do your deals in good faith.

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