A short sale is the usual outcome of selling a home in foreclosure. In this transaction, the mortgage lender agrees to accept less money to settle the bill because the borrower can no longer handle the repayment. If the state allows it, the creditor can sue for a deficiency judgment to force the debtor to pay the remaining unpaid balance, eliminating the financial loss.
If you are planning to pursue a short sale as a last-ditch effort to avoid a full-on foreclosure, you have to accept that the fact that it is nevertheless going to bring down your FICO scores. Although there is no escaping this inconvenient reality, there are ways to help rebuild credit moving forward. Below are the ones you should do.
Avoid Further Delinquency
It is probably too late not to have an adverse payment history once you are facing foreclosure. However, you should still do your best not to be delayed in your payments leading up to the short sale. This move sets the stage for an early rebound.
While a short sale does not disappear from your credit reports for about seven years, not being delinquent in your last payments ends your mortgage account on a good note. Demonstrating your ability to pay your bills on time and in full even if you had financial troubles along the way can give other lenders confidence that you can do better the next time around.
With punctual payment, you can improve your creditworthiness within two years closing your mortgage account. If you do not make questionable credit decisions during this period, you will have a better chance to qualify for a home loan again.
Write Your Lender a Goodwill Letter
A goodwill letter is a request you ask your mortgage lender not to remove your late payments from your credit reports. There is no guarantee that the other party will agree when they did not get paid in full as a result of a short sale.
Nevertheless, you might be able to convince your lender to grant your wish, especially when you fail proper repayment due to an extraordinary event. Also, your mortgage lender can count the short sale a blessing since a total loss is much worse.
Minimize Credit Card Usage
As you take the path toward credit recovery, it is imperative to rethink how you use your plastic. Credit utilization represents about 30% of FICO scores, so you should use your available credit wisely. Ideally, your total credit limit should not exceed 30% to be considered a responsible consumer.
If you do not have any revolving consumer credit, open an account. Use it as a tool to offset your negative payment history with a good new one.
Now and then, review your credit reports and make sure they are free from inaccuracies. A single incorrect item in a file can ding your credentials severe enough to send one credit score tier down.
You can dispute errors with the credit bureaus that generate the reports or the creditors that reported the wrong data. If all else fails, the Consumer Financial Protection Bureau is always ready to help.
A short sale is the logical first step to credit damage control. You can no longer undo your mortgage delinquency, but you can get back on your feet in no time if you play your cards right.