A short sale can resolve a mortgage you can no longer afford, but it does affect your credit. If you live in Reading or elsewhere in Middlesex and Essex Counties and are weighing a short sale, it helps to understand how it will be reported, how long it stays on your record, and how soon you may be able to buy again. This guide also covers alternatives that may let you keep the home.
Key Takeaways
- A short sale is reported as negative information and can remain on your credit report for up to seven years.
- Missed payments before the sale also appear on your report and often do more damage than the sale itself.
- Waiting periods for a new mortgage depend on the loan type and your circumstances.
- Get a written waiver of any deficiency before closing; otherwise the lender may be able to pursue the unpaid balance.
- Forbearance, a loan modification, or bankruptcy may be alternatives worth comparing first.
How Does a Short Sale Show Up on Your Credit Report?
In a short sale, the lender agrees to accept less than the full mortgage balance. The account is usually reported as "settled" or "paid for less than the full balance," which credit scoring models treat as negative. Under federal credit reporting rules, this information can generally remain on your report for up to seven years, measured from the first delinquency that led to it.
Late payments reported before the sale (30, 60, 90 days or more) appear separately and can lower your score on their own. Review all three credit reports after closing, compare the dates and balances with your records and the lender's approval letter, and dispute any entry that is inaccurate.
How Much Will My Score Drop?
There is no fixed number. The impact depends on your starting score, whether you missed payments before the sale, and the rest of your credit history. People who start with higher scores often see a larger drop. Foreclosures, deeds in lieu, and short sales all hurt credit, so the choice between them usually turns more on what you will still owe and your housing goals than on credit alone. See our comparison of foreclosure, deed in lieu, and short sale.
Protect Yourself From a Deficiency in Massachusetts
A short sale does not automatically erase the rest of the debt. Unless the lender agrees in writing to waive the deficiency, it may be able to pursue the unpaid balance after the sale. Before closing, ask for a written approval that states the lender accepts the sale proceeds in full satisfaction of the loan. If the lender forgives part of the debt, the forgiven amount may be treated as taxable income, so talk to a tax advisor. Learn more about taxes on debt settlements and short sales.
How Soon Can I Buy a Home Again?
Mortgage waiting periods after a short sale vary by loan program and can change, but they commonly range from about two to four years. Some programs allow a shorter wait if you were current on the mortgage before the sale or if the hardship was caused by extenuating circumstances. A lender will also look at your income, debts, and payment history since the sale. See obtaining financing after a short sale.
Rebuilding Credit After a Short Sale
- Pay every bill on time; payment history is the most important part of your score.
- Keep credit card balances low compared with your limits.
- Review your credit reports regularly and dispute errors.
- Save for a down payment and build a realistic housing budget.
Alternatives to a Short Sale
Forbearance temporarily reduces or pauses payments during a short-term hardship. The skipped amount still has to be repaid, so understand the repayment terms before you agree.
A loan modification permanently changes the loan terms, such as the interest rate, term, or payment, so you can keep the home if the new payment is affordable.
Bankruptcy may help when mortgage trouble is part of a broader debt problem. A Chapter 13 plan can let you catch up on mortgage arrears over time while keeping the home.
Talk to a Reading, MA Attorney
The Law Offices of Matthew T. Desrochers, P.C. has helped homeowners in Reading and throughout Middlesex and Essex Counties with short sales, loan modifications, and bankruptcy since 1999. Call (781) 279-1822 or contact us online to discuss your options.
Frequently Asked Questions
Will a short sale affect my credit if I'm current on my mortgage?
Yes. The settlement itself is reported as negative information even if you never missed a payment, although avoiding late payments limits the overall damage.
How long does a short sale stay on my credit report?
Generally up to seven years, measured from the first delinquency that led to the short sale.
Can I get a mortgage again after a short sale?
Yes. Waiting periods depend on the loan program and your circumstances and commonly range from about two to four years.
Will I still owe money after a short sale?
Possibly. Unless the lender waives the deficiency in writing, it may be able to pursue the unpaid balance. Get the waiver in the written approval before closing.
Is forgiven mortgage debt taxable?
It can be. Whether forgiven debt is taxable depends on current tax law and your circumstances, so consult a tax advisor before closing.
This article provides general information about Massachusetts law and is not legal advice. Reading it does not create an attorney-client relationship. Every case is different; contact an attorney about your specific situation. Attorney Advertising.