Information on effect of short sale on credit score - The Bills.com Blog

Bill I am selling my house and will owe more than we get from it. Is it automatically a "short sale" if the amount is lower or only when you go through the short sale process? I don't want to go through the formal process if they would just allow me to get a loan or something and avoid having my credit ruined.

No, because you are upside down on your mortgage does not mean that you are aumatically qualified for a short sale. A short sale has to be discussed with your current lender and only if the lender approves, will you be able to go through the short sale process. Not all lenders will accept short sales, especially if it would make more financial sense to foreclose; moreover, not all sellers nor all properties qualify for short sales. Check out this article for more information about qualifying for a short sale: http://homebuying.about.com/od/4closureshortsales/qt/112707_QualSS.htm

Hi Bill, I'm in the process of selling my home through a short sale. The buyer keeps trying to lower and lower the price. Will my credit be affected even more if I lower the price by 5,000 more, or doesn't it matter?

If your lender has agreed to a short sale, then lowering of the price is not going to hurt your credit any further.

Bill im in the process of mandatory job relocation. Dont have no equity on the property for over 2 years now and too much debt. Can i do short sale while im overseas or out of state? What will happen to me if im behind 3 months on mortgage payment and i want to do a short sale ?

Jeff, a short sale is something that you need to discuss with your lender. It is dependent on the lender as to whether they will let you do a short sale or will initiate foreclosure. In most cases of default for 3 months, the lender will initiate foreclosure, but given the depressed markets some of them will hold off for a bit if the value of the home is not enough to cover the balance on the loan. You can read more about short sale at http://en.wikipedia.org/wiki/Short_sale_(real_estate).

Hello, I just recently did a short sale on my home I was never late on any payments and just wanted to downsize is it ever so possible for me to get another home loan within a year or so I pulled my credit score yesterday It has not shown up yet my median score is 788, closed on property June 2008

If were never late on the payments, then it might not show up. You have a great score, as stated in the article, short sale do not have much of an impact on your credit score. I see no reason why you should not qualify for another mortgage.

Assuming I have a buyer and the lender agrees to the short sale how long is the typical wail to close?

That really depends on the time your lender takes to finish the process.

We bought 2 houses as rentals 5 years ago. We have found out since then that we were victims of mortgage fraud. We paid between 25,000 and 30,000 for each house and call sell for 10,000. We thought it was the banks responsibility to make sure that an accurate appraisal was obtained. Can a short sell work for us? We have enough money in our retirement account to cover the loss so does that preclude us from this.

Yes, a short sale could work but you will need your lenders to agree (in writing) to this strategy. If you really were the victim of fraud you should consult and attorney and see if you can get the mortgage bank to take back to properties for no cost. That could be a lon and expensive legal process, however. Good luck. Either way, you should call your lenders quickly.

I'm trying to get rid of the house I bought before I got married. I tried to sell it for over a year-no luck. Tried to rent it for 6 months-no takers. My lender approved me for a short sale. I'm a little worried about having a "settlement" on my credit report because my husband wants to be able to refinance the house we live in now...Should I be? Also, should I use a real estate agent or do "for sale by owner"?

You should seek counsel from an attorney, but a few considerations are: 1. is you use an agent, it will cost more but might increaset the likelihood of getting a sale done (and may be less personal stress), 2. could your husband qualify for a refi without using your income? If so, then you could do a short sale and hurt your own credit but protect his and let him refi the house just in his name. This one involves many decisions and is a little more complicated than a quick blog answer would justify, so be sure to ask friends and maybe a loan officer or two to get good advice. Good luck.

My family has an unexpected, immediate, job related move of about 1300 miles. We are upside down on our mortgage by at least $30,000.00. How difficult is a short sale 1300 miles away from the property? Does the Realtor get their commission from the sale or would I be personally liable? Do you have a good 'first step' suggestion? Other than ruining my credit score for the time being, why not foreclosure?

A short sale is something that will have to be discussed with your current mortgage lender as you cannot conduct one without the permission of the same. People opt for a short sale as it does not leave a negative remark, like a foreclosure would, on your credit profile. I suggest you speak to your current lender about your alternatives.

To Melissa, don't worry about 1300 miles. I'm doing a short sale from 10,000 miles! For Bill, I don't understand one part of the article. It says the lender must approve a short sale but then says the lender may pursue you for the deficiency. Why would they agree to take less in a short sale then sue you afterwards? Another question if you are current with your mortgage and the lender accepts to begin a short sale, does it make any sense to keep paying the mortgage?

Cliff, the question of a deficiency balance arises only if there is a second mortgage associated with the property. It is the second mortgage lender who may try to collect on the loan as he is not getting anything out of the short sale. As far as your second question is concerned, as a short sale is a solution that is reached with the agreement of your lender, if they insist that you be current on your loan till the sale takes place, then it would be best if you continued on your payments.

Bill: We currently have 2 mortgages on a home we purchased in Dec 2005 (bought at the high end of the market). Our neighbors all around us are selling in the mid 600's (we owe 680k). We have never been late with a mortgage pmt. have decent credit. We are reading mixed reviews for a a short-sell. In order for us to get out of our current home it seems as though are only option is a short-sell. Our relator has suggested this as we do not have 30 to 50 k to put toward the closing of a house (to get out clean). What will a short-sell do to our credit? What does it actually state on a credit report and with all the new government housing assistance is there another option for us so we do not tank the great housing credit we have already established? Any suggestions to get out of this home would be great appreciated.

The only program I have heard about is the "HOPE FOR HOMEOWNERS" program. You can read more here: http://www.hud.gov/news/release.cfm?content=pr08-150.cfm. I have not come across any instances of customers who have actually received any assistance as such. A short sale is still a much better than having your home foreclosed upon. If you plan to stay in the home then it makes sense to keep paying on your mortgage (if you can afford the payments) until a concrete mortgage bailout plan emerges.

Bill, from all the above posts I am reading it seems as though a short sale will not affect my credit score. I own a home with my ex. The Mortgage is $525 but it is only worth $410. I was able to find someone to rent it but the rent only covers half of the mortgage. We both want out of the house. We both also have jobs that rely on our credit scores. My Property Manager suggested a short sale but in the long run it CAN NOT affect our credit scores. We have been on time with our mortgage payments since we purchased the home in 2006. Would a short sale be a good idea? I read somewhere else that it all depends on what your mortgage company tells the credit company. Also, what will we be looking at as far as Taxes on the short sale? Is it true that we will be taxes for the short fall of money we can't pay the bank?

It is quite possible to do a short sale and still have decent credit afterwards. When you do a short sale, you can sometimes negotiate with the bank about two major issues: how they report your credit, and how whether they can go after you later for their financial losses. The reason you can sometimes negotiate this is that you are not letting your house go through the foreclosure process and leaving it to the bank to deal with. When you do a short sale you are helping the bank. You are getting rid of a problem for them. One of the myths about short sales is that you have to be late on your mortgage. It is quite possible to do a short sale without ever being late on a single payment. Some lenders will be difficult to negotiate with unless you are late but if you are sharp in negotiating you can often overcome this issue and never be late and do the 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. Also, you are right about the tax liability for the shortfall arising out of short sale. Again, this depends how how your lender decides to report the shortfall. Some are known to follow up for deficiency judgments (if you have a second mortgage, they might opt for this route), but usually they will just declare the shortfall as income via a form 1099. You should discuss all of these matters with your lender before doing anything with respect to the short sale of your home.

We are in the process of selling and appears that the offer will be about $10,000 short of what we would need to break even (1st & 2nd mtg, closing costs). Can I try and do a short sale with both the 1st & 2nd mortgage holders or just consentrat on one. I owe about $53,000 on the 1st and $39,000 on the 2nd. So it won't be a total loss for either.

You need to speak to both of your lenders to discuss the modalities of the sale. Your first mortgage lender will have first claim on the sale, so I am guessing that the shortfall will only be for the second.

We did a short sale on our house in October after having it on the market for 3 years. We were never late on our payment. Our lender agreed to do the short sale because we were so upsidedown and we were on an arm that was killing us. It really didn't affect our score (we are about a 650 and were a 670). However, on one of the Big 3 bureaus, it says "foreclosure". I have disputed it since we were never late. The rest of the credit agencies just have settled. How will this affect us in buying a house?

As long you have your paperwork showing the dispute with the one credit bureau that is reporting it as a "foreclosure", you should be fine. The credit bureaus can be a pain to work with, you will have to be really persistent. Not all mortgage lenders will look at all three bureau reports, even if one does so, you should be able to explain what happened.

Like many of the previous bloggers, I have a question about how a short sale will be reported to the credit agencies. We have never been late or missed a mortgage payment. We did, however, qualify for a short sale when I was laid off from my teaching job this past June. It looks like we have an acceptable offer on our home. I was wondering if the bank would be likely to report the sale "paid as agreed" if we've been current on our payments. It was my understanding this is something I could negotiate with our lender. Also, if it's reported "paid as agreed" I was told we'd be able to purchase a more affordable home right away. What do you think?

The actual reporting of Short Sales depends on factors unknown right now. Your first mortgage type; purchase or refinance, is one of the factors as is whether or not the lender has agreed to allow you to sell the property and has also released you from the difference between the owed amount on the property and the short sale amount (that difference is generally known as a deficiency balance). Other factors exist, such as a second mortgage on the title and other potential/existing liens. Generally speaking, if they are not looking for a deficiency balance payment plan or pay-off, then they may be waiving your responsibility to that difference. You should talk with you Real Estate Agent and your lender surrounding the exact terms of your short sale and your responsibility; if any, post-sale. As far as Credit Agency reporting, that is solely up to the lender/creditor in question. They are mandated to report factual information. Again, this is where you should talk with your lender about their policy on reporting short sale transactions and whether or not language is contained in your short sales agreement surrounding their reporting to agencies. Many lenders will report it similar to a voluntary repossession, which would hurt credit.

Sorry if this is a repeat but I don't think my question went through the first time. I'm still not understanding if the bank agrees to report to the credit bureaus a short sale as "paid as agreed", would one be able to purchase another, more affordable home immediately? Thank you.

They might report it as "paid as agreed" or "settled for a lower balance", it really depends on your lender. You will have to wait at least 2 years before buying another home. You can read more here: http://homebuying.about.com/od/4closureshortsales/qt/060907SScredit.htm

I am currently going through a divorce. Neither of us can afford the home by ourselves, but the home will not sell for what we owe. My wife is concerned that a short sale with negatively affect our credit for many years to come. What kind of time period would we be looking at before our credit scores rebound enough to be credit worthy again? Right now each of us has credit scores of 776 and 781, and neither of us has been delinquent on anything.

First off, you need to check with your lenders to see if they open to the short sale option as a short sale can only happen with the approval of your lenders. While a short sale is not as bad as a foreclosure, it will still hurt your credit, but not as bad. While there is no way to estimate the time it will take to recover your credit, I have heard that you need to give it at least 2 years before you can start to look for home loans again.

Here's my short sale situation. Hopefully it helps some people. I sold short last year and I recently checked my bureau and the score was ~748. I thought this was high considering. We called the bank to let them know that the acct was still open and they needed to "take care of it". The next day I get an Equifax alert stating my score jumped to 813. I looked into it and the bank had reported the mortgage as "paid as agreed". This surprised me to say the least. I don't know if this is the reason, but our situation was that we were living beyond our means and still paying current. We were forced to use credit cards more than we wanted so we could pay our mortgage and knew we needed to get out of our house asap or we'd be in serious trouble. Our bank told us in order to do a short sale we had to be late so we missed one payment. After we sold the house the remaining balance was ~ $22k. Why the bank didn't say "settled" is beyond me. I guess $22k is chump change compared to other people...

Thanks for your input. Lenders tend to report a short sale in different ways, and as you have experienced, if they report as "Paid as Agreed" then the impact to your credit will be less.

hi, i am approved to do a short sale and will have no payments in arrears at the time of settlement. My lender has agreed to show that the mortgage is "paid in full." do you know how this may affect my credit score since i will not be delinquint on any payments? will the short sale be on my credit report or negatively affect me from getting a great rate on a home purchase in 3-5 years (i have a 750 credit score now)? will my credit remain intact? where can i find this information out? thanks

If the lender really reports the mortgage as "paid in full" then you have an excellent outcome. The impact on your credit score will be minimal at worst, and actually positive if the lender follows through on its promise. As I mentioned in an earlier reply, different creditors report short sale outcomes differently, and for many people the impact on their credit score is mild at worst and much, much better than a foreclosure.

thanks Bill, i really appreciate it. I just spoke to the lender, and they said it would be reported "Paid in full for less than the full amount." the lender could not answer specific questions about how this would affect credit score or credit report, but they suggested i contact the credit bureaus for that information.

Hi Bill, great information here! I am wondering if when you submit documentation to your lender if that will include 401k too? We bought in CA 2004 and our home is now lost at least half its value. My husband was laid off last year and his new job has reduced our income so much that we have CC debt now and a debt to income ratio or 45-55%. What does the bank really look at to determine hardship. Because we are living beyond our means, mostly because we can't afford our mortgage and property taxes. thanks.

Contact the lender to learn if retirement accounts need to be included in your asset statement. The authors of the 401(k) rules did not want retirement accounts to be used as piggy banks for daily household expenses. On the other hand, a person can make a hardship withdrawal under some circumstances. According to IRS document 401(k) Resource Guide - Plan Participants - General Distribution Rules, a 401(k) plan may allow you to receive a hardship distribution because of an immediate and heavy financial need. According to the IRS document cited, a immediate and heavy financial need includes, "Payments necessary to prevent the eviction of the employee from the employee's principal residence or foreclosure on the mortgage on that residence." If you will be evicted from your residence if you do not receive a distribution from your 401(k), then you may be able to argue to your 401(k) administrator that your distribution request is for an immediate and heavy financial need.