A short sale happens when a property owner owes more on the property than what the property can actually sell for. This happens when the property owner chooses to sell the property when the value of properties has dropped. A short sale will also occur when the property owner is facing foreclosure and the bank sells the property for less than the amount owed, after a short sale the owner will not make any profits but will still owe money. When all this happens to the property, their credit score will be greatly affected in a negative way, because their credit report will indicate all the amounts owed that are not yet paid up.
A short sale can affect your credit score greatly. Most lenders require that you should have at least missed one mortgage payment before being approved for a short sale of your home. This process involves selling your home for less than what you owe on the mortgage.
In this case the lender writes off the difference between what is owed and the income received from the sale of the house. In the short sale, it is impossible to quantify the impact on your credit score. Because the amount of missed payments in short sales varies according to the following factors, the loan amount and the amount of debt forgiven.
According to MortgageFit, a short sale will drop your credit score ranging from 75-100 points which is about 100 points less than a foreclosure. A short sale that took a period of two months to complete, with only 1-2 missed payments will have a small impact on your credit score than a sale that took a one year, whereby the borrower missed several months of payments. However the impact on your credit score will depend on your credit score before the short sale.
After a short sale, your credit report will not look good for a couple of years. Your lenders will inform credit bureaus about the amount of money borrowed and the monthly installments that you are required to pay. When you enter into a short sale, your lender will inform the credit bureaus about the closing transaction, and what the credit bureaus do is to calculate the difference between the balance owed and the required final payment on the debt.
Unfortunately for you, such details of the short sale will remain on your credit report for up to seven years. This information can be seen by other creditors who will see that you failed to pay back your mortgage in full causing a negative impact on your credit score. However the good thing is that many credit bureaus will focus more on your recent credit activities, if your account has a positive account history then it is least likely that a short sale will do you harm.