Short Sales and Credit Scores

There are many events in your life that could negatively impact your credit score.  One of those events that I often deal with is the short sale of your home.  A short sale, essentially, is when a person sells their home back to a mortgage company for less than what they paid for it because the home is now worth less than it was when it was purchased.

A short sale will negatively impact your credit score.  The amount of impact varies from person to person and from situation to situation.  However, everyone’s score will be negatively impacted, and one of the most common questions I get is “How do I improve my credit score after the short sale?”

Improving one’s credit score will take time – there is no “quick fix.”  But by focusing on certain aspects of your credit, you can try to lessen the blow.  Here is a look at how your credit score is comprised, and tips on how to utilize this information so that the short sale does not have as much of an effect:

Payment History
35% of your credit score is based on your Payment History.  Even if you are unable to make your house payments, try to make at least the minimum on your credit cards and other loans you may have.  This will make the impact a little bit less harsh

Amounts Owed
The next largest part of your Credit Score is the amount you owe – 30%.  If you decide to do a short sale and cannot pay your mortgage, try to put some of that extra money towards paying off your credit cards or car payment.  The less outstanding debt you have, the better, and the best thing you can do for your credit score is to pay your accounts off as soon as you can.

Length of Credit History
It may be tempting to close your credit cards once you start getting into financial troubles, but 15% of your credit score is based on how long you have had your accounts open.  If you can manage your accounts, it is best to keep them open.  This does not have as much impact as your payment history or the amounts owed, but it is the third largest portion.  If you are having troubles keeping up with the minimum payments and you have high interest rates, the creditor may offer to lower the APR if you close the account.  This will impact your credit score, but it may be the best option if it makes the payments more affordable.  Be sure to weigh the pros and cons; if you are afraid you will be late, that will have a higher negative impact than if you close the account.  But if you can afford the payments, and keep your account open, that will actually help you increase your score.

New Credit (10%) and Types of Credit Used (10%)
If you open several new credit accounts in a short amount of time, that is a red flag – It signals to the Bureaus that you are in financial trouble, because you need to borrow money.  Also, different kinds of credit have different effects – Retail accounts are not looked at as favorably as, say, a car loan.  If you are having financial difficulties, opening new accounts will not help you improve your score, and will most likely have a negative impact.

These are some ideas to keep your short sale from impacting your credit score as much as it could.  If you would like some more information on your credit score and how it is formulated,  click here for more information at MyFico.com.  You can also give me a call at (910) 622-0319 or  email me by clicking here.  As a short sale expert, I’ve helped people in many different situations.