In America, your credit rating is about as important as your blood type. While you can’t change the latter, you can protect and correct your credit rating from inaccurate or misleading information. Losing a house through foreclosure will severely damage your credit rating, but there are alternatives.
If your home is worth less than your mortgage balance, you might be tempted to simply abandon the property or let the bank foreclose on it. A much less damaging plan is to agree to a short sale. The bank sells the home at an attractive price and forgives the remainder of your mortgage. In some cases, you might even receive a relocation bonus for agreeing to a short sale.
If you are a homeowner who participates in a short sale, you will want to stay on top of any changes to your credit rating. With a little forethought and remedial work, you can escape from a short sale unscathed. Foreclosures are far more problematic, which is one reason why many homeowners prefer short sales.
Here are some handy tips for protecting your credit rating during a short sale:
Stay Current on Your Mortgage: Nowadays, most homeowners in financial distress can successfully qualify for a short sale without defaulting on mortgage payments. Rules set by the Federal Housing Finance Agency encourage mortgage lenders to grant short sales without a lot of qualifying documentation. If you decide to pursue a short sale because of relaxed requirements, continue to make your monthly mortgage payments during the sales process. In this way, you can avoid an automatic credit score reduction of 60 to 160 points.
Find Mistakes in Your Credit Report: By law, a credit report must be completely accurate and verifiable. However, the vast majority of credit reports have mistakes. These mistakes are usually not in your favor, so it is important for you to correct them. Typical mistakes include:
- Incorrect dates and amounts
- The report indicates that the mortgage was charged off, when in reality you made a payment in exchange for release of lien
- The mortgage account was closed, but your credit report still lists it as open
- Missing payments and fees
File a Qualified Written Request: Any mistakes made by your mortgage provider or servicer can be corrected by filing a Qualified Written Request, as per the Real Estate Settlement Procedures Act. Use this form to correct any questionable charges, entries, documentation and loan history payment details.
Get Help: It’s a good idea to enlist the services of a short sale specialist, attorney and/or credit counselor to help you navigate through a short sale with minimal damage to your credit. If you are contemplating a short sale, contact a housing counselor approved by the Department of Housing and Urban Development. HUD offers programs to make short sales easier and protect your credit rating. The Making Homes Affordable website can give you full details.