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Short Sale=Foreclosure
Following my comments is an article by Liz Pullman, about some other aspects of a short sale.
Several months ago all lenders (may be one exception) started treating short sales as if they were foreclosures. This means that you can not get an FHA loan for 3 years after the transfer date and 5 years for conventional/conforming loans.
I don't think that this fact should deter someone from going ahead with a short sale if necessary, but if it is not needed, it can be a mistake.
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Liz Pulliam Weston:
Money Talk
Short sale of home hurts credit scores
Liz Pulliam Weston, Money Talk
August 3, 2008
Dear Liz: I sold my house for less than what I owed on the mortgage, not realizing that this short sale would affect my credit scores. Because of this drop in scores, I recently received a letter from my credit card company closing one of my unused accounts.
I have two other cards with the same company, one of which I actively use. The other I haven't used for two years.
Is there a chance the credit card issuer will close these accounts as well? I have two more inactive accounts with other issuers. Is there again a chance that these will be closed too? What can I do?
Answer: Any time you don't pay a creditor in full, you risk damage to your credit scores. As I mentioned in a recent column, the leading FICO credit scoring formula doesn't have a specific code to denote a short sale, but lenders may use codes that indicate a settlement for less than what's owed -- and that's considered a serious black mark against your credit.
If your scores plunge, your credit card issuers may react by raising your interest rates, lowering your available credit or closing your accounts entirely. Having your limits lowered or your accounts closed can further damage your scores.
Your issuer may be less likely to close your accounts if you keep them active, but there are no guarantees. If you do use the cards, don't carry balances and don't charge more than about 30% of your credit limits. (Using 30% or less of your credit limits can help improve your scores, and not carrying balances is simply smart money management.)
To rehabilitate your scores, continue using your cards frequently but sparingly. Pay your bills on time, and consider getting an installment loan, such as a personal loan or an auto loan. The interest rate you'll pay will be high, so try to get the shortest possible loan and pay it off as quickly as possible. Having both types of credit -- revolving lines such as credit cards and installment loans -- and using them responsibly can help restore your scores over time.
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