What Happens to My Credit If I Do a Short Sale?

Credit is one of the biggest fears homeowners have about a short sale. The truth is less scary than most people expect.

Be honest about where your credit already is

If you're already 60, 90 or more days behind, your credit has already taken a hit. A short sale doesn't create that damage. The missed payments did.

So the real question isn't "Will my credit be affected?" It's "Which option causes the least long-term damage?"

Short sale vs. foreclosure

Foreclosure is one of the most damaging events on a credit report. It usually stays for up to seven years, is viewed very negatively by future lenders and typically means the longest wait before you can buy again.

A short sale is still a negative event, but it's generally much less damaging. It's reported as settled or paid for less than owed, and recovery is usually faster.

How much will my score drop?

There's no single number. It depends on your starting score, how far behind you already are and how the lender reports the final result. For many people, the short sale itself adds less damage than the late payments that came before it.

Can I buy a home again?

Yes, and often sooner than people think. Waiting periods depend on the loan type and your circumstances, and guidelines change, but as a general idea:

• VA loans: often about 2 years
• FHA loans: often about 3 years
• Conventional loans: often about 4 years, sometimes less with documented hardship

Waiting periods after a foreclosure are usually longer. Lenders will also look at how you recovered and whether the hardship is behind you. Talk with a mortgage lender about your specific situation.

Why waiting hurts credit more

Many people delay because they're afraid of the credit impact. But waiting usually means more late payments, and a foreclosure does far more damage than a short sale. Acting sooner often protects your credit.

The bottom line

Credit can be rebuilt. Thousands of homeowners who completed short sales have gone on to buy homes again. The biggest mistake is letting fear delay action.