When a home is sold for less than the outstanding mortgage balance, the transaction is known as a short sale. The borrower avoids foreclosure when the lender agrees to accept the money as full payment for the debt. The details on how long short sales stay on credit reports and why they could be preferable to foreclosure are provided below:
1. Length of Time on Credit Report: A short sale may be reported for up to seven years after the transaction date. Usually, the transaction is noted as "settled" or "paid in full for less than the full balance." Depending on the credit reporting agency and how they report, the precise time frame may change.
2. Benefits over Foreclosure: There are a number of benefits to choosing a short sale versus a foreclosure, including:
Less Negative Effect on Credit Score: Although a short sale does have a negative effect on credit, it is typically regarded as less severe than a foreclosure. The average reduction in credit scores caused by foreclosures is several hundred points, and they can stay on credit reports for up to seven years.
Borrowers may be able to recover and repair their credit more rapidly than after a foreclosure because a short sale is considered as a proactive way to resolve the problem.
c. Easier Loan Qualification: Lenders may be more willing to give loans to borrowers who have experienced a short sale as opposed to a foreclosure. Lenders are more likely to regard short sales favorably since they demonstrate that the borrower made an effort to pay off the loan.
d. Possibility of Avoiding Deficiency Judgment: In some circumstances, a short sale agreement may contain a clause that exempts the borrower from future responsibility for the outstanding loan sum. This may help the lender avoid seeking a deficiency judgment, which is a court order requiring the borrower to pay the remaining sum following a foreclosure.
It's significant to note that a short sale's precise effects on a person's credit score and financial circumstances can differ. It is wise to speak with a financial advisor or credit counselor to fully grasp the potential ramifications and to investigate the best solutions for your particular situation.