Here's What Happens to Your Credit Score When Your Home Has a Short Sale

There may come a point when you start struggling to keep up with your mortgage payments. Missing a single payment might hurt your credit score, but it typically won't result in foreclosure. Rather, you generally have to skip multiple payments in a row for your lender to consider foreclosing on your home.

Now, if you can't keep paying your mortgage, the easiest thing to do from a financial standpoint may be to just sell your home. It may not be ideal, but if you owe $220,000 on your mortgage and your home could sell for $250,000, you'll be able to walk away from that situation largely financially unscathed.

But what if your home can't sell for a high enough price to pay off your mortgage? In that case, you may want to ask your lender to agree to a short sale. Doing so could get you out of a tough situation without risking foreclosure. But you should know that a short sale could have implications from a credit score perspective.

How a short sale works

In a short sale, your home is sold for a price that's lower than your mortgage balance, and your lender eats the difference. So if you owe $220,000 on your mortgage and your home sells for $200,000, your lender takes a $20,000 loss.

Why might a lender agree to a short sale? It's simple. The foreclosure process can be complicated and costly for lenders. A short sale might help them recoup most of what they're owed, and that might read like a better option than running the risk of foreclosure.

Will a short sale impact your credit score?

A foreclosure could have a major impact on your credit score -- and not a good one. But it generally won't have nearly the same negative impact as an actual foreclosure.

Now, the extent to which a short sale drives your credit score down will depend on different factors, including your payment history and how high or low your score is to begin with. The damage will also hinge on whether you missed mortgage payments prior to that short sale or not.

Any time you have a late payment on your credit report, whether it's a mortgage payment or a credit card payment, your credit score has the potential to drop -- and quite a lot. So there's really no single rule of thumb when it comes to how much exactly a short sale will cost you in terms of your credit score.

However, Experian says a short sale could remain on your credit report for up to seven years. That's not quite ideal.

Keep in mind that a short sale isn't the same black mark as a foreclosure. You will generally need to wait at least two years following a short sale to apply for a mortgage again. But chances are, if you reached the point of needing a short sale, it's probably best to wait a while before committing to another mortgage anyway.

Also, if you reached the point where you couldn't pay your mortgage, it may be that you were late on other bills, too, resulting in credit score damage. So it's generally best to wait a while to get a large loan like a mortgage in that sort of situation. That way, you can work on rebuilding your credit to qualify for a more attractive borrowing rate in the future.