What is a short sale?
A short sale is where you make an agreement with the bank to accept payment terms, many times are less than what is owed on the mortgage.
How does a short sale with the bank affect my credit score?
A short sale can have a significant impact on your credit score. Here’s how:
- Credit Report: A short sale will appear on your credit report as “settled” or “paid in full for less than the full balance”. This indicates that you didn’t repay the full amount of the mortgage.
- Credit Score Drop: Because payment history is a major factor in credit scoring, settling a debt for less than the full amount can lead to a drop in your credit score. The exact impact varies depending on your overall credit history and the scoring model used.
- Deficiency Balance: If the lender doesn’t waive the deficiency (the difference between the sale price and the mortgage balance), it could be reported as a negative item, similar to a foreclosure.
- Duration: The negative impact of a short sale can last for several years, but you can start rebuilding your credit immediately by making timely payments on other debts and keeping credit utilization low.
While a short sale can hurt your credit, it’s often less damaging than a foreclosure and can be a better option if you’re facing financial hardship.
Sources
How Does a Short Sale Affect Credit? – Experian
How a Foreclosure or Short Sale Affects Your Credit Score | Chase
How a Short Sale Could Affect Your Credit – Upsolve
How can you make money with a short sale as an investor?
Investors can make money with a short sale in several ways, but it’s important to note that it comes with significant risks. Here are some common strategies:
- Buying at a Lower Price: If an investor shorts a property and the market value drops, they can buy it back at a lower price, pocketing the difference as profit.
- Flipping: Investors might buy a distressed property at a lower price through a short sale, make improvements, and sell it for a profit.
- Renting: Instead of selling immediately, investors can rent out the property to generate income while waiting for the market to improve.
- Negotiating with Lenders: Sometimes, investors can negotiate favorable terms with lenders, such as reduced purchase prices or favorable financing options.
However, short sales can be complex and risky. It’s crucial to thoroughly research and understand the market, as well as have a solid exit strategy.
