Will Selling Your Home for Less Than You Owe Hurt Your Credit?
At one time, homeowners waited until they could make a profit to sell a home. As a general rule, it was best to wait at least a few years for the real estate comps to rise. If, for some reason, someone was forced to move after a year or two, that person could still often sell the home and break even.
In today’s real estate environment, even homeowners who have logged years in a residence find they owe more than the current market value. As the economy improves, this means many mortgage holders will be faced with the decision to sell at a loss, paying the remainder due to the bank simply to get out of a mortgage. This has led many homeowners to ask if such a move counts a short sale, which can damage a person’s credit.
What is a Short Sale?
Generally, a short sale occurs when a homeowner can no longer pay his mortgage. The borrower negotiates a repayment amount less than what he owes and the lender accepts based on some proof of hardship. In some cases, the homeowner may be required to repay the difference at a later date but in others, the excess amount is waived.
When this happens, in some cases the lender reports the short sale to credit bureaus, causing a drop in the borrower’s credit score to drop as much as 200 points. Many homeowners who negotiate a short sale see a score drop simply due to the fact that they’ve had multiple late or non-payments leading up to the negotiation process.
Alternatives for Borrowers
For many homeowners, working with the bank to pay the difference may be a viable option. This could include taking out a loan or borrowing money from a friend to ensure the loan is paid in full at the time of closing. As long as the homeowner’s mortgage is paid on time each month, a borrower’s credit wouldn’t be impacted.
Even for consumers who lack the funds to sell a home at a loss and pay the difference, a short sale isn’t the only option. Some homeowners opt to rent a home in order to continue making mortgage payments on it while living somewhere else. Over the course of several years, market values will likely elevate to the point where the home can then be sold without taking a loss.
Some homeowners also opt to use a rent-to-own option, where a contract is put in place that a renter will eventually own a home after making payments for a set period of time. This is a bonus for a renter who couldn’t otherwise buy a home and it helps a homeowner who can’t currently sell.
Ideally, a homeowner should stay in a home until the market value improves. However, if a mortgage holder can afford to pay the difference when his home sells for less than the balance due, selling at a loss will have no impact on the homeowner’s credit.
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