Believe it or not, a Short Sale does not have to be a negative occurrence on your credit report. On the other hand, a foreclosure ranks up there just under a Bankruptcy, which is an extremely negative occurrence on your credit. Let’s talk about how these two affect your credit.

How Many Points Will My Credit Score Drop With A Short Sale?

The mortgage that is affected by the short sale should reflect the short sale verbiage within 60 to 90 days. This short sale verbiage is made in the form of a notation made under the account which says “Agreed Settlement Short of Full Payment”, or words to that effect. I’ve got some good news for you though; these types of notations mean nothing as they don’t affect your credit scores in any way.

If you were late on your payments prior to the completion of the short sale, you can expect your credit scores to drop about 120 points on the average. The amount your score actually drops depends on the amount of trade-lines you have, the length of history on your credit, and whether or not you’re late on anything else, among other things.

It will take about 2 years to recover from a Short Sale on your credit if you had late payments associated with it. Of course this is assuming you have good credit in other areas and continue to keep it that way.

How Many Points Will My Credit Score Drop With A Foreclosure?

A foreclosure on your credit can drop your credit score up to about 250 points on the average.

It takes about 3-4 years for your credit to recover after a foreclosure.

Avoiding a Derogatory Mark because of a Short Sale:

If you never made a late payment on your mortgage prior to completion of your short sale, chances are, you may come out of this process smelling like a freshly scooped litter box.

If you can prove to your lender that you are on the road to “Imminent Default”, more than likely they will agree to a short sale. An example would be if you were transferred on your job to another city and you bought a new house. Your old house has been listed for 6 months, your mortgage to value ratio is upside down, and you only have enough money left in savings to make 2 more mortgage payments. The bank at that point will determine that you are in imminent default status, and hopefully agree to a short sale. As long as you can keep up with the mortgage payments until the house sells, you will not have much of a hit to your credit.

Being late on your mortgage payment is what destroys your credit score. The later they are, the worse your score gets. A 30 day late is not going to affect your credit score too much. A 60 day late is a little worse, but it’s still not going to drop your score all that much. Once you get to 90 days and beyond, watch out…..your credit score is going to fall down faster than the Drop Zone at an Amusement Park and it’s going to smell like you haven’t scooped the poop out of the litter for a month! YUCK….

Unfortunately, coming out of a short sale with your credit score unscathed is the exception to the rule. Usually, in order to even be considered for a short sale by your lender, you needed to be behind on your mortgage payments. So we’re back to the stinky cat box scenario.

How Soon Can I Buy A House Again After A Short Sale or Foreclosure?

Fannie Mae will no longer allow borrowers with foreclosures from getting another mortgage through them for five years, unless there are “documented extenuating circumstances. In those cases, they will reduce this time to three years. So make sure you document your hardship and why you had to let your property go to foreclosure. Even after 5 years, if you’ve filed foreclosure, you will have to come in with 10% down and will need a minimum credit score of 680.

A short sale is not viewed the same as a foreclosure. As long as you work on re-establishing your credit and optimizing your credit scores, you could purchase another home getting a fair rate at around 18 months. However, if you do not do anything to restore your credit it could be several years before you are able to obtain reasonable financing.

If you were 120 days late or more on your mortgage before the short sale, it is considered a foreclosure by lenders and will require 3 years seasoning before you qualify for FHA or conventional financing again. If you weren't 120 days late then you technically would qualify after 12 months without mortgage or rental lates.

What Can I Do To Help Increase My Credit Score After A Short Sale or Foreclosure?

Normally negative occurrences don’t continue to have “as much” of a stinky effect on your credit score after 2 years, so you may be able to mitigate the negative effect Foreclosure has on your credit by immediately adopting good credit habits. Make all your payments on time. Keep old accounts with long histories open and active if you can. Don’t charge more than 30% of your high credit limit on any revolving accounts. Don’t carry an excessive amount of accounts with balances.

Source: http://CreditTrauma.com