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I just read an interesting post on this topic, and thought I'd share some of it with you. It details some of the things homeowners can do to help mitigate the damage done to your credit scores after a short sale.
"The short sale can be reported as a foreclosure but more often it is reported as "paid - settled". This is a definite ding on your credit, but not a severe one compared to multiple delinquencies, charge-offs, foreclosure or bankruptcy. It is a very good idea to do a short sale as compared to running out of savings and ruining your life just to maintain 50 points on a credit score, at least that is how I see it.
It is also possible for the bank simply to remove derogatory reporting. They may say they can't remove something but in fact they can.
Or, they can substitute "unrated", which is neither good nor bad. Unrated as an alternative to "paid - settled" is a great outcome but even if you can't get the bank to agree to this, it is still important to try.
Then there is another move. You can write a letter to the bank demanding this as part of the conditions for the short sale, and then continue with the short sale and complete it. That way you can then challenge the derogatory credit report afterwards and you have a shot at getting it removed based upon your letter. The bank may not have the appetite or staff to handle the challenge, and depending upon your state laws, they may have to remove the derogatory report anywhere from 10 to 30 days later."
As you can see, there are ways to combat the negative reporting. Remember, the entire short sale process is a negotiation. The bank does not have to accept your offer if it's short. They make a strategic decision about which outcome (short sale vs. foreclosing) is in their best interest. In many cases, they'd rather not carry the property as an REO, and will agree to a short sale. Knowing that you have a bargaining chip in that they don't want the house, you can request things in return...like how you'd like the transaction reported to the credit bureaus.
For the full article quoted above, please click here.