How Low Will My Credit Drop After a Short Sale or Foreclosure?

With credit scores, one can easily predict the possibility of you making payments on time, paying off loans, and helping a lender determine whether you are a risk. Credit scores are determined by an individual’s lending history and ability to repay and manage debts based on the agreement. Factors like letting your mortgage payment slide, failure to make timely payments tend to affect your credit score. There is every tendency for your credit score to be impacted if you suffer a foreclosure or short sale, which will, in turn, make you a potential risk for a lender.

If you are thinking of taking a short sale or foreclosure for your home, after reading this, you will become aware of how much your credit score could drop. However, at this point, it is necessary to consider the meaning of short sale and foreclosure

WHAT IS A SHORT SALE?

With a short sale, you have the opportunity of selling your home and using the gains or proceeds from the sale to pay off your mortgage irrespective of whether the profits don’t make up the full balance. When you attempt to sell your home for even less than you owe in a short sale, the lender earns the proceeds. Not every lender will be open to the idea of a short sale, and homeowners have to be at least 90 days late for the lender to be open to that idea. In some cases, lenders might choose to forgive the unpaid balance on the mortgage or not. In some states, certain laws allow lenders to seek deficiency judgments, which ensure that you pay the difference between the balance due on the mortgage and the sale price.

WHAT IS A FORECLOSURE?

There is every chance for you to be faced with a foreclosure when you fail to make your mortgage payments, and the lender chooses to seize and sell your property in other to make up for their financial losses. It takes a lender four missed payments to result in foreclosure proceedings. The foreclosure process tends to vary by state, but if you are going to be faced with a foreclosure, then you would receive a notice most likely through a mail.

HOW LOW A SHORT SALE CAN REDUCE YOUR CREDIT SCORE

A short sale will most likely affect your credit score and not just by a small margin. It is capable of dropping it to as low as 100-150 points and that depends on where you started; your credit score will only fall more based on how high it was. Short sales are regarded as the worst things that can affect your credit score. Credit scores tend to range from 300 to 850; for example, if you have your credit score between the range of 750-800, it can easily reduce to 150 points or lower in a short sale. If you are within the range of 650-720, after a short sale, you could lose 100 points and fall into what is commonly referred to among lenders as the subprime category.

HOW LOW A FORECLOSURE COULD REDUCE YOUR CREDIT SCORE

Foreclosures tend to have more effect on credit scores. Now according to FICO, based on a person’s starting scores, a fair number of homeowners who go through a foreclosure experience a drop in their credit score from between 85 and 160 points. An individual with a good starting score of 680 could reduce to between the ranges of 579 and 594, which is regarded as a fair or poor score range, and someone with an excellent score of 780 may reduce between 620 and 642. Foreclosures can affect a consumer’s credit for as long as seven years.

It is necessary to understand this because a low credit score can make it difficult or impossible to borrow. Plus, as your credit scores drop, your interest rate will only continue to increase even if you are eligible for credit loans.

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