Reader’s Question

Hi Ashley,
If you sell a property using a short sale, how does this affect your credit score? How many pionts will it reduce your score? Would I be better off credit-wise by just letting the house go into foreclosure?
Thanks!

My Response

Dear [name removed],
A short sale will destroy your credit — anywhere from 50 – 100 points. A short sale won’t hurt your credit as bad as a foreclosure but the difference isn’t that much. If you can get the lender to do a short sale, I would do that.

-Ashley

Take Home Point

A short sale is when a mortgage lender agrees to basically lower the amount due on a loan. This usually happens when the amount due is more than what the house is worth and the homeowner is unable to pay their mortgage . When this is the case, the lender lowers the loan amount so the home owner can sell the home for market value. You might be asking yourself, why would the lender do this? Well, they do it to avoid a foreclosure. Keep in mind that in the event of a foreclosure, the lender would then be responsible for selling the house and even then, they are likely only to get market value for the house. Therefore, a short sale will in the end cost the lender less than a foreclosure.

Reader’s Question

My fiance and I are planning to buy a house within the next few months. We recently submitted a preapproval application with our bank and I finally convinced him to get a free credit report from annualcreditreport.com. We discovered that there is a incorrect item on his report from about 7 years ago that is due to go off his report in April (approximately the same time that we’re hoping to close on a house). It’s for an unpaid utility bill for less than $50 that is listed as being written off. My fiance has documentation to prove that the utility company was in error and did not cancel his account when he moved as requested and the charges were not his (and he send multiple letters to that effect at the time they were hassling him about payment). Is it worth our effort to try to get this item off his credit reports? He has no other potentially negative items and I have “perfect” credit. Should we just let it fall off his report?

Thanks!

Response

(by the way — to the reader who sent in this question, your reply email address wasn’t working, so I hope this response finds you)

Hi [name removed] -
I would write a short letter to each of the credit agencies, simply stating something such as…

“To Whom It May Concern -
After reviewing my credit report recently, I noticed the following inaccuracy: Utility Company Inc, Acc # XXXX. I dispute this as inaccurate and kindly ask that you remove it.”

I am quite certain since it’s so old you’ll have no problems getting it removed. It’s doubtful the utility company will take the time to verify such an old account (if they even can, which it sounds like they can’t).

I wouldn’t just wait for it to fall off right before a home purchase –you don’t want it to affect your mortgage interest rate.

Best,
Ashley