How does a short sale affect your credit report and is there anything you can do about it?

It depends on how the bank reports it to the credit reporting agencies and.. they have lots of options. Sometimes, if you’re lucky, they don’t report it at all. Or, it could even show up as a foreclosure.

They can also report it as settled. This usually happens when an agreement has been reached between the lender and the borrower to repay only a portion of the original debt. This does hurt your credit but not as much as multiple delinquencies, a charge-off, a foreclosure or a bankruptcy. (A charge-off is when the lender transfers non-collectibles to a category such as bad debt or loss.)

If you do have a short sale with your lender, request that they report it as unrated. The beauty of unrated is that it is neither credit-positive nor credit-negative.

And it is possible for the lender, as a condition of the short sale, to remove any derogatory reporting that has already taken place! The lender may tell you that they don’t have the ability to do this, but they do and they can.

Write to your lender and demand that one of these scenarios be a condition for your short sale. If they don’t respond to you and the short sale is completed, you can then challenge any derogatory credit reporting that occurs and may be able to get it removed based on your letter.

As you can see, there are options if you’re facing foreclosure or a short sale and want to protect your credit status. The situation may not end up as bad as you think.

Any other ideas or experiences with credit and short sales?