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A short sale will still hurt your credit score, but shows future creditors that you have been cooperative in finding solutions..

Overview

A short sale occurs when a property is sold and the net proceeds are less than the amount owed on the mortgage. Regardless of whether its effects are better or similar to a foreclosure or a deed-in-lieu--when the owner voluntary surrenders the property to the lender to avoid foreclosure proceedings--a short sale will have a negative impact on your credit score. Still, future creditors may have a more favorable outlook of you as a borrower, given that a short sale indicates that you have been cooperative with your lender in working out a solution, rather than letting the property go into foreclosure.

Time Frame and Process

A short sale is one of the final options that lenders will offer homeowners in default on their mortgages. A borrower cannot attempt to negotiate a short sale until the later stages of the foreclosure process. Therefore, getting to the short sale stage could take at least six months after the first missed mortgage payment. In order to achieve a short sale, the borrower must list the property with a real estate agent for at least two months; the time frame may vary according to lender conditions. Once a potential buyer has been found, the real estate agent then has to submit the offer price, along with other documents, to the lender. Once the lender receives the documents, it will assign a negotiator to the loan. Discussions from this point forward could take anywhere between two weeks to 60 days, but can take longer during economic downturns due to a backlog.

Getting a Short Sale Approved

Once a potential buyer has been found, the borrower and the real estate agent have to submit the following documents to the lender: seller's hardship letter, third-party authorization letter permitting the real estate agent to act as a liaison between the borrower and the lender, two of the borrower's recent pay stubs, his most recent bank statement, his last two year's W-2 forms and tax returns, and a comparative market sales analysis of the property's trade area or a Broker's Price Opinion. The comparative market sales analysis or Broker's Price Opinion is provided by the real estate agent. The analysis typically provides an overview of home sale prices within the property's immediate neighborhood or zip code. The Broker's Price Opinion provides the real estate broker's estimate of the property's value.

Credit Score Makeup

Your credit score is composed of your payment history, debts owed, length of credit history, new credit and types of credit used. Your payment history and amount of debts owed account for a significant portion of your credit score calculation. Therefore, it is important to make sure you pay your debts on time and that you do not exceed your credit limits.

Credit Rating

A short sale does not actually appear on your credit report as a "short sale." That's why it is important to know how the lender reports the status of your account to the credit bureaus. In rare instances where the lender agrees to state that the account has been "paid" and the borrower has not missed any payments, the short sale will have no negative impact on the credit score. However, most lenders will state that the account has been "settled," meaning that an agreement was reached to repay only a portion of the original loan balance. As a result, the deficient amount is written off as a loss for the lender, and your credit score will drop.

Credit Rebuilding

The aftermath of a short sale or any significantly negative financial event will require the responsible use of existing or new credit lines in order to rebuild your credit score. A credit card offers the easiest way to rebuild your score. Make small and frequent purchases with your credit card, and make sure to pay off balances on time. Car and student loans can also help you on your road to financial recovery.

by M. Shayne Arcilla, Demand Media