How an exemption or short sale affects a credit score

A short sale may be better for your rating than an overdraft. There are several ways in which a withdrawal or short sale affects your credit score. If done correctly, a short sale can have less of an adverse effect on your credit score than a foreclosure.

Exclusion modes affect your credit score

The disconnect stays on your credit report for a long time. Here are some ways it affects you.

  • The delays that precede the refund have a major impact on your credit score.
  • FICO, the agency that calculates credit scores, carefully maintains its scoring system, but it is estimated that a foreclosure may reduce the score from 175 to 300 points.
  • The exclusion will remain on your credit report for ten years.

If possible, to preserve your credit score, consider an alternative to a payday, such as a short sale or a lie on the face of foreclosure.

Short sales can have less impact

While it is possible, short sales that have minimal effect on your credit score are difficult to achieve. Your lender must approve a short sale, which means you need to send them a package of information about your finances.

One way to reduce the impact is to work with your lender to negotiate a short sale without reducing your payments. As part of the negotiation, ask your loan to report the sale as “paid in full.” This can reduce the weight as it appears on your credit score.

Your lender may not provide quick approval of a short sale, so if you are strapped for cash, it may be difficult to avoid a down payment during this process. The borrower may also choose not to qualify for the short sale, in which case you have to decide whether you want to try to keep the house or release on the inmate.

Additional resources

Distressed Property Institute offers a certification class for realtors who want to specialize in affected properties. Buried in their material is this seizure document with respect to short sales. This section provides additional details on how soon you will be able to qualify for a new home purchase loan after selling a short sale or foreclosure.

In addition, these two articles provide unusual, detailed information on foreclosure and short sales and how they affect your credit score:

  • Short sales and non-sales affect credit
  • Will Short Sales Ruin Credit?

I would also suggest you order a free DVD Exemption Avoidance, offered by the National Credit.