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What’s a Credit Score?

Credit scores measure the risk of defaulting on a loan. When you apply for a mortgage, the mortgage company will measure how likely you are to default based on established criteria and then make a decision if they think you’re worth the risk. Here are the 7 factors that affect your score:File:Credit-cards.jpg

  1. Loan repayment behavior –  Have you paid back loans on time, or have you made late payments or missed payments.
  2. Credit score inquiries or requests for credit – When you check your credit, counter-intuitively, your credit score goes down. Applying for a loan also reduces your credit score. Save those inquiries and loan applications for when you need it.
  3. Delinquency – If you’ve defaulted on a loan, your credit score will drop.
  4. Length of established credit – If you’ve never had a credit card or a loan before, you is less likely to have a high credit score. Having a credit card, and paying the balance every month, boosts your credit score a little bit each year.
  5. Composition of credit – Revolving debt, such as with credit cards, affects your credit score differently than a loan that you pay back in installments. A variety of types of cards will benefit your credit score.
  6. Quantity of credit already available – The more you can borrow, the higher your credit score.
  7. Amount of outstanding loans – If you already have debt, you’re less likely to qualify for more debt.

The most widely used credit score in the United States is the FICO score. FICO is named for the Fair Isaac Corporation.

The FICO score is calculated according to the following categories:

  •  Payment history                35%
  • Amounts owed                   30%File:Credit-score-chart.svg
  • Length of credit history       15%
  • New credit                         10%
  • Types of credit in use          10%

FICO scores range from 300 to 850.

For more information on mortgages and credit:

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What is a Short Sale?

What Is A Short Sale – A short sale is when a homeowner sells their home at a price that is below the mortgage on the home. For example, if homeowners owe $200,000 on their existing mortgage but the property’s market value is only $180,000, the sale would be a short sale. The sale can only occur if the lender approves the sale.

Why are there so many short sales now? The average homeowner stays in their home about seven years. Usually, seven years is enough time, especially in vibrant New Jersey, for homes to appreciate in value and usually, after seven years, the market value has increased. For example, a house purchased in 1995 for $250,000 may have sold in 2001 for $375,000, resulting in profit for the homeowner as well as a paid off mortgage. 2011 is a unique year in that housing prices aren’t as high as they were in 2005, and, in most markets, are actually lower. Therefore, a home purchased in 2005 for $250,000 may only be worth $180,000 now.  If the homeowner owes more than the home will sell for, the sale is a short sale.

Short sales are much more common in 2011 because home prices dropped quickly and left many homeowners owing more than the home was worth.

How is a short sale different from a foreclosure? A foreclosure results when the lender demands payment for outstanding debt and the homeowner can’t pay the debt. The lender then has the right to file for foreclosure, which deeds the home to the lender.

After a short sale, the seller’s credit report will show that the mortgage debt was settled for less than full, but the balance of the mortgage is $0. The seller’s FICO credit score is affected by about 50 points.  Late payments, on the other hand, affect your credit score by about 30 points per month. (Source:

Typically, sellers who sold short do not need to report this to future mortgage lenders. After a short sale, you may be eligible for a Fanny Mae loan on a primary residence or investment property after only two years.

After a foreclosure, the seller’s credit report will show that the home was sold in foreclosure and that the balance of the mortgage is whatever amount the sale did not net. It is also important to note that foreclosed properties usually sell for about 60% of current market value, according to a May, 2011 report. (Source:

After a foreclosure, the seller’s FICO credit score is lowered by at least 300 points and stays on his or her record for 10 years. (

In almost all instances, a short sale is a better option than a foreclosure.

Applying for a Short Sale – In order to qualify for a short sale, the homeowner must first write a hardship letter explaining why he or she can no longer handle the debt. The lender will require specific details as to why the mortgage is now a hardship, and a smart homeowner will include all relevant reasons.

Some of the major reasons why hardship is usually granted are:

Lenders are also more likely to approve a short sale if the borrower has paid their mortgage on time consistently. Hardship letters should also be brief and to the point. The explanation for the hardship should be specific but not technical. Writing with feeling and emotion may help to persuade the lender to grant hardship. It is also a good idea to include copies of bank statements, tax returns, and any other documentation that may support your claim.

Short sales are unlikely to be approved for these reasons:

It’s not a bad idea to use a sample hardship letter to give you ideas. A good one can be found at

This post is part of an eBook on selling your home that can be obtained for free by emailing

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