How Selling a House Affects Credit

Answer

If you are concerned about the impact that selling your home may have on your credit score, you should know that the sale of your home may have very little impact, if any impact at all. Even if having a favourable overall credit history won’t lower your score, it’s possible that it won’t really enhance it either in the long term. The most significant disadvantage is that you will no longer have a history of ongoing mortgage payments that creditors and lenders may use to evaluate the level of credit risk you provide to them.

How It Works

Even while selling your home won’t trigger a drop in your credit score, maintaining a mortgage payment history might actually boost your score. When determining your credit score, a significant amount of weight is placed on whether or not you are timely with your mortgage payments. Even though you shouldn’t be late on any of your payments for any of your bills, a history of on-time mortgage payments is one of the first things lenders check for when reviewing your credit report.

Credit Risk

Lenders will investigate your credit history to determine whether or not you have a track record of making regular and on-time mortgage payments. If you no longer have a mortgage, a lender will not have that information as a current gauge of your credit risk since they will not have that information. According to Credit.com, even after you have paid off your mortgage, the history of having a mortgage will stay on your credit report for up to ten years. Your credit score may be negatively impacted for up to seven years if there are unfavourable entries on your credit report; however, the impact will lessen as more time passes. The reason for this is because potential lenders are interested in seeing how you now handle your credit.

Reducing Debt

If you sell your home, you may use the money from the sale toward paying off other obligations or reducing the amount you owe on those loans. Even if you pay off your mortgage and reduce your overall debt load, having other high debts can still have a negative impact on your credit score. According to MyFICO, reducing the amount of debt you owe on your revolving credit cards is one of the most efficient ways to reduce the total amount of debt you owe as well as enhance your credit score. You may improve both the quantity of accessible credit as well as your credit score by focusing on paying off the cards that are closest to their credit limits first. This will free up more of your available credit.

Short Sale

Your credit score is going to take a significant hit regardless of whether the event is a foreclosure or a short sale, even if the former may appear less dire than the latter. In the event that you find yourself in a difficult financial situation, your mortgage lender could agree to let you sell the property for an amount that is less than the remaining balance on the loan. Despite this, the lender of your mortgage loan will still consider you to be in default, and they will report this fact to the credit bureaus. The decision to file a lawsuit against you for any difference that you are unable to pay rests entirely in the hands of the lender. Your credit score will drop even more if you have a judgement shown on your record. However, in many instances, the lender will choose to accept the tax write-off rather than file a lawsuit.