Moving Forward After a Short Sale
A short sale will have a significant impact on the seller’s credit and ability to purchase another home. However, it is not the end of the road and with careful negotiation and preparation, it is possible to purchase another home in just a few years.
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Impact of a Short Sale on a Credit Report
A short sale can have a significant impact on an individual’s credit report. Typically, the lender will report that the debt was “settled” via a short sale. This means that less than the full amount of debt owed was repaid. This can cause a credit score to drop as much as 200 points.
One way to lessen the impact of a short sale on a credit report is to ask an FCRA attorney to negotiate with the lender and request that they use the word “paid” when reporting the sale to the credit bureaus. This could reduce the point drop to as little as 85 points. Because a short sale stays on a credit report for seven years after the loan is closed, it is worth investing the time and effort to negotiate this.
Ironically, the higher an individual’s credit score at the time of the short sale, the greater the impact on the credit score. This is because the scoring model calculates that an individual with good credit who defaults or initiates a short sale as quite possibly having problems with other accounts in the immediate future.
Cleaning Up Credit Reports
One of the most important things to do following a short sale is to begin the process of repairing an individual’s credit. Up to 20% of consumers have errors on their credit reports, and up to 25% of these are affected by errors that cause a significant drop in their credit scores. Common errors include incorrect balances and inaccuracies regarding late payments and accounts that were turned over for collection. Because this process of correcting these errors can be lengthy and time-consuming, not to mention the impact it can have on employment, etc., it is best not to delay.
Following a short sale, individuals should check and monitor the information on their credit reports closely. Fraud alerts should be put in place and any errors that are discovered should be disputed. An FCRA attorney can help individuals dispute inaccurate information that creditors have placed on the credit report.
Once a dispute is filed, the credit bureau has 30 days to complete their investigation. However, if the individual is in the process of applying for a new mortgage, it may be possible to undergo a “rapid update.” In such instances, the mortgage lender may work on behalf of the borrower to update or correct inaccuracies within the credit report.
If the credit bureau fails to remove inaccurate information from an individual’s credit report, the FCRA allows individuals to file suit against the bureau. However, many bureaus have forced arbitration clauses within their Terms of Service. As such, it is advisable to read the Terms of Service and speak with an FCRA attorney prior to pulling a report and filing a dispute.
Small Steps to Rebuilding Credit & Finances
It is important to remember that slow and steady wins the race following a short sale. One of the best ways to repair credit following a short sale is to make sure that other bills are taken care of and reported accurately. This includes utility payments, cell phone bills, student loans, etc.
In cases where the individual is struggling with these bills, it is important to negotiate lower interest rates, payment plans, etc. with the creditor. Doing so can help mitigate the inflow of negative information onto a credit report.
Other steps that can be taken include opening secured credit accounts and paying down balances on existing unsecured credit accounts. Individuals who do this can see a considerable boost in the credit score. Moreover, doing so can encourage lenders to increase available credit limits. As long as an individual does not “max” out these limits, the boost to a credit score can be considerable.
Buying Another Home After a Short Sale
Individuals who had an FHA home and desire to purchase another home using an FHA loan must wait three years and be able to put down 3.5% down payment. For those with a conventional loan, the period is extended to four years and a 5% down payment.
Those who had a Fannie Mae HomeReady loan must wait four years and be able to put forward a 3% down payment. Finally, individuals who qualify for a VA loan need only wait 2 years and are not required to put forth a down payment.
Those who are able to may purchase a home using a conventional loan only two years after a short sale. However, this requires being able to put forth a 20% down payment.