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How a short sale or foreclosure can impact your credit score

minute read

    Have you ever driven down a street and seen a sign posted in front of a house with the word "foreclosure" and wondered what that really means? You may have heard the term before or noticed the signs around your neighborhood, but what is the true impact of a foreclosure and other mortgage-related financial pitfalls?

    In this article, you will learn about:

    • Foreclosures and how they impact your credit score
    • Short sales and how they affect your credit score
    • Ways to avoid foreclosures and short sales
    • How long foreclosures and short sales stay on your credit report
    • How to rebuild credit after a foreclosure or short sale 

    What is a foreclosure?

    A foreclosure is when a mortgage lender seeks to have your property sold in an effort to recover the balance due on your loan when you fail to make your mortgage payments. After the foreclosure happens, it can appear on your credit report as a derogatory remark, which may remain on your credit report for up to seven years.

    How does a foreclosure impact your credit score?

    How much your credit score may be impacted by foreclosure is largely based on how high your score is to begin with and if there are any other remarks you may have on your report, such as bankruptcy or late payments.

    According to Experian™, one of the three main credit bureaus, foreclosures occur after you've missed about four consecutive monthly payments (or about 120 days of delinquency). Missed payments are another form of derogatory remark (or negative item), which can bring down your credit score more than other negative items.

    What is a short sale?

    A short sale is when someone sells their home for less than the value of the mortgage due to financial challenges. Upon sale, the lender receives the proceeds and can either forgive the remaining debt or have the borrower pay the remaining difference.

    How does a short sale affect your credit score?

    A short sale may appear as "settled" or "legally paid for in full for less than the full balance," depending on the credit bureau your report comes from.

    A short sale may still hurt your score because you were unable to settle your debts, but it's not a specific indicator that you have missed payments prior to that, which would further negatively impact your score.

    Ways to avoid a foreclosure or short sale

    As you can see, both foreclosures and short sales can negatively impact your credit score and make it harder to pursue future financial opportunities. Foreclosures are the result of consistently missing mortgage payments, while short sales may occur due to lack of funds to cover all your debts. A short sale could also be seen as a way to avoid a foreclosure, because you're avoiding the missed payments remark and are instead looking to settle your debts in other ways.

    However, if you want to avoid a short sale and the consequences that could come from that, you may want to consider applying for mortgage assistance options offered by your lender, which could include a loan modification that may offer a reduced monthly payment. So, how can you avoid getting to a point where you need to foreclose or short sale your home?

    You can:

    • Catch up on your payments by adjusting your budget
    • Research and work with a reputable credit counselor who can provide free advice on how to manage your debts
    • Consider talking to your lender about modifying or adjusting your current plan so that you can continue to pay whatever you can

    How long does a foreclosure or short sale stay on your credit report?

    A foreclosure is considered a derogatory remark and may appear on your credit report for up to seven years.

    When it comes to short sales, you may see something slightly different listed on the credit report. For example, it may appear as "not paid as agreed" rather than "short sale," but like a foreclosure it may last for up to seven years on your report.

    How to rebuild your credit after a foreclosure or short sale

    Foreclosing a home or going through the process of a short sale can be overwhelming. You're already trying to juggle your finances as it is, and now you're dealing with the aftermath to your credit score. While this may feel daunting, know that with planning and patience you can recover from this and rebuild your credit.

    For example, you can:

    • Lower your credit utilization ratio, such as paying down credit card balances by paying off credit card bills or using less of your credit limit towards your purchases
    • Improve payment history by paying your bills on time consistently
    • Potentially seek guidance from a credit counselor to help adjust your budget and manage debt
    • Monitor credit and set score goals by enrolling in Chase Credit Journey®

    Additionally, after the seven years is up, the derogatory remark will be removed from your credit report. This could help open up opportunities for you to get better rates on loans, future mortgages and more.

    Bottom line

    No one wants to go through the process of having their home foreclosed or having to short sale their home, but depending on your financial circumstance, it may be a choice you have to make. While it may impact your credit, remember that you can actively build back your credit score by taking actionable steps and planning ahead with tools like Credit Journey®. Your financial health is not defined by this one event — the culmination of your choices over time can help put you back on the right track and make future purchases — whether that's a home, car or something else — less taxing. 

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