Short sales continue to increase despite the seeming rebound in housing markets across America. According to RealtyTrac, short sales and foreclosures comprised of 16.2 percent of U.S. home sales in 2013. This was up from 2012, when 14.5 percent of home sales were short sales and foreclosures.
In a short sale, the mortgage lender agrees to let a homeowner accept an offer for their home that’s less than the amount owed on the loan. The bank takes all the proceeds, but the seller walks away with the remaining debt forgiven.
Choosing to go that route will put a serious dent in your credit score, but it’s not a fiscal death sentence. You can rebuild your credit and your finances after a short sale.
Immediately After a Short Sale of Your Home
In many cases, banks and lenders view a short sale as the equivalent to a foreclosure. Credit bureaus and future lenders consider it similarly to a default on your mortgage. The three major credit bureaus list it on your credit reports for seven years, but you can take steps immediately after a short sell to help restore your financial profile.
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“You should regularly pull your free credit reports through AnnualCreditReport.com,” says Todd Christensen, director of education for the National Financial Education Center. “For someone who is rebuilding their credit, they could consider accessing one of their three available reports every four months in order to check for accuracy in addition to any unfamiliar or fraudulent activity.”
Another critical task is to ensure that your loan balance has been forgiven. If it hasn’t been, you could find a collection company coming after you. Be aware, you also must claim the forgiven debt as income when you next file taxes.
Building and rebuilding credit is like the fable of the tortoise and the hare: Slow and steady wins the race. The short sale has less of an impact on your credit score each year after the event.
One to Four Years After a Short Sale
In those first few years, focus on small financial victories. “A simple and free way to begin the credit rebuilding progress is, first to ensure all utility, cell phone contracts and Internet provider payments are made on time and in full,” says Christensen. Ask these companies if they report your on-time payments to at least one of the three major national credit bureaus. He says they’re not typically required to do so, but they often will if asked.
The credit bureaus don’t give utility and cell phone payments as much weight as good credit card stewardship, but they will help move the needle. And every little bit helps.
You may also find that without notice, other creditors will lower your credit limit after your short sale. Wording giving them that option is often included in the fine print of the contracts and user agreements of credit cards and other debt. Don’t let that be a reason to make any more damaging credit moves.
“Keep paying bills on time, avoid applying for new credit, and don’t close credit card accounts,” says Miranda Reiter, a certified financial planner at She & Money Financial Planning. “You’ll want to keep the cards open so that as you pay down your balances, your debt to credit available ratio is lowered, which improves your score.”
Good budgeting can be one of your most vital tools in the years following a short sale. With a damaged credit score, you may find yourself with little to no ability to depend on credit cards as a backup plan. So it’s doubly important that you work to build up a solid emergency fund and prepare a written monthly family budget.
Want to see other tips on how to recover from a short sale? Be sure to check out the complete article on AOL Daily Finance.
Note: This article has been reprinted with permission.