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MAR 22, 2012

Information on effect of short sale on credit score

How will a short sale of my home affect my credit?

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Bill's Answer: Bills.com Resident Expert

Editor’s note: See the Bills.com resource Short Sale, Foreclosure & Your Credit Score to see Fair Isaac & Co.'s answer to this question.

Generally speaking, a short sale occurs when a homeowner who is behind on his or her mortgage payments, and who owes more on his home than it is currently worth, contacts the mortgage lender asking the lender to allow him to sell the home for less than the balance of the mortgage.

For example, if you owe $100,000 on your mortgage, but are only able to sell your home for $80,000, you would need to have your mortgage lender agree ahead of time to allow the sale to proceed. In fact, there is little use in putting your home on the market until you, or your attorney, have spoken with your mortgage company's loss mitigation department to discuss proceeding with a short sale.

Many lenders will authorize short sales in an attempt to prevent property from falling into foreclosure; however, some lenders will not allow short sales to proceed. Usually, no lender will authorize a short sale unless the borrower is already in arrears on his mortgage, as the lender will see this as evidence that the borrower can no longer afford the home. In addition, your mortgage lender's loss mitigation team will probably want to see documentation of your income and assets to verify that a financial hardship exists and that you truly cannot afford the home.

If your mortgage lender approves a short sale, the next step is to find a buyer willing to pay a reasonable price for the property. Some people try to take advantage of individuals who are trying to conduct a short sale by offering significantly less than the home is worth, hoping that the owner will accept the offer out of desperation. Once an offer is made on the home, you will need to consult with your lender, and the lender will have final say-so in whether or not the sale can proceed at the offered amount. When first talking to the loss mitigation department, you may want to inquire as to what amount the mortgage lender considers reasonable so you can gauge what offers you can expect to have approved.

If you are successful in selling your home in a short sale, you may still be liable for the difference between the amount you owed on the mortgage and the amount of the sale, which is referred to as a deficiency balance. If you owe a deficiency balance, your lender may be able to pursue you for collection of the debt, depending on your state's laws regarding deficiency balances on homes. Some states, such as California, do not allow for the collection of deficiency balances on purchase money loans. However, if you live in a state which does allow for the collection of deficiency balances, your creditor may be able to sue you and obtain a judgment for the amount owed. Many creditors do not pursue former homeowners for deficiency balances even in states where they are allowed to do so, preferring to use the loss as a tax write-off. I encourage you to discuss this with your mortgage holder and an experienced real-estate attorney prior to proceeding with a short sale. An experienced attorney should be able advise you of your state's laws and may also be able to assist you in negotiating with your mortgage lender.

Credit Score

In regards to your credit score, the negative credit impact of a short sale is less than that of a foreclosure. A short sale will not appear as a foreclosure on your credit report, and therefore only the previous delinquency on your mortgage will appear. Also, I believe that most mortgage lenders report a mortgage that is paid through a short sale as being in a redemption status.

Although the delinquency and change of status on your mortgage loan will certainly lower your credit rating, from my experience, the negative impact is less than the negative credit implications of an actual foreclosure. If you must choose between a short sale and allowing your home to go into foreclosure, from a credit perspective, a short sale is the wiser choice.

Again, I encourage you to speak with an experienced real estate attorney to discuss the details of your situation to help you determine the best course of action in your circumstances. To learn more about foreclosure, short sales, and other options available to homeowners struggling to meet their mortgage payments, I encourage you to visit the Bills.com Foreclosure page.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

Comments (122)


Anthony P.
Springdale, MD  |  March 14, 2012
My situation is almost exactly the same as what Jason S. posted. My condo is very underwater. My HOA will not allow me to rent it out because they have reached the rental ceiling for our community. I am planning to refi if possible with harp 2.0. That might help lower my payment a little but it will not help me with the major issue which is that my wife and I could easily afford a mortgage payment on a luxurious single family home 3x the size of my current condo if I wasn't tied down by this condo, with no hope of getting back to its original price within the next 5-7 years. I've been scouring the internet trying to find a solution, but I keep reading the same answers: the conservative folks say "pay your mortgage and be grateful!", the liberal folks say "bail out". I just wish there was some way to cut ties with my current place and not feel guilty for further screwing up my neighbor's property value. I REALLY don't want to miss out on the opportunity of historic low interest rates and much lower home prices that will benefit us for at least the next 30 years! I bought my current place in 2005 right around the worst time unknowingly to me and all others. And now is the worst time NOT to buy a home. I don't know if there's anything new you can tell me that I haven't already read. I guess I'm just writing all this to say I'm frustrated and show solidarity with everyone else in my boat..or submarine actually. Thanks.
Bills.com
March 14, 2012
Anthony, I admire the consideration and concern you have for how your actions could affect your neighbors. I think that it is worth factoring in your decision. At the same time, you should look at all your options.

For instance, if you have a non-recourse loan, working to negotiate a short sale or walking away from the home may make sense. Other factors to consider are: what your HARP mortgage payment will be, what rents in your area are, would you be happy renting until your credit improved (should you walk away or do a short sale) enough to buy another home.
Jason S.
Salem, OR  |  March 02, 2012
My current situation is as follows: I (my name is the only name on the loan(s), not my wife's) am currently underwater on my home by about $35K. My 1st (and 2nd) mortgage is NOT serviced by either Fannie or Freddie, therefore (at this time) I'm not eligible to refi under HARP. I am current on payments and can afford to continue to make them going forward. My question is this: going forward, having a growing family with a need for a larger home and the income between my wife and I to be able to afford a larger home (if not for my current, underwater home), what options/suggestions do I have?
Bills.com
March 02, 2012
I have no bright ideas or tidy, pain-free options for you. My best idea? You mentioned you alone are on the existing loan, which leaves your spouse as a credit score lifeboat if you cannot exit the loans cleanly. Allow me to explain: Let us say your spouse qualifies for a home loan alone, without including you as a co-signer. She buys the new house in her name. Meanwhile, you quit the old house and either short-sell it or if the mortgage servicer is not reasonable, allow a strategic default. Worse-case scenario, the lender(s) files a lawsuit against you for the deficiency balance, and you either negotiate a reasonable settlement or file for bankruptcy that will discharge the deficiency.
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Jason S.
Salem, OR  |  March 02, 2012
I appreciate your response. I was thinking similarly to your suggestions. Along those lines, in an attempt to avoid paying the deficiency to my lender after a Short Sale, are lenders (B of A, in this case) willing to get creative in order to maintain business. By "creative" I mean more specifically, would a place like B of A be willing to forgive the deficiency owed on my part if my spouse, purchasing another property without my co-sign, was willing to purchase through their lending? It may be analyzing apples (me) and oranges (my spouse), but I'm curious if you've ever witnessed any type of "arrangement" like this before?
Bills.com
March 03, 2012
A mortgage servicer, such as Bank of America rarely, if ever, owns its home loans. A mortgage servicer has a fiduciary duty to each of its loan investors. That means it cannot put its own interest, or the interest of another investor, above any other investor.

What you suggest would place the investor of the old loan at a disadvantage to the new investor.
Rick B.
Lexington, SC  |  February 23, 2012
My ex and I were divorced in 2009. While we were married we purchased a new home in 1996. She was given the house in the divorce settlement and was listed as fincially responsible for it. I signed the deed over to her immediately after the divorce and thought I was done with it. I found out a year leter that I was still on the loan and that she had fallen behind on the payments. I petitioned Bank of America to get off of the loan but they refused it. It is now up for Short Sale. Is it possible to get this fixed on my credit report after the sale goes through?
Bills.com
February 23, 2012
A home loan is a contract between a lender and borrower(s). A divorce order/decree does not change the contractual relationship between the home loan lender and borrower(s). A divorce decree orders parties how to divide their assets, but is not binding on third parties. In other words, you can wave your divorce decree in front of Bank of America, and it will reply, "We are not a party to that decree."

You can try to have this derogatory removed from your credit report in the future, but if the derogatory contains accurate facts, the credit reporting agency may ignore your dispute.
Bryan D.
Tucson, AZ  |  February 15, 2012
I am active duty military and bought a home in AZ in 2009. I am now anticipating permanent change of station (PCS) orders sometime this year and am considering a VA compromise sale on my property as it is significantly underwater. Does a VA compromise sale hurt a credit score as much as a regular short sale? I am current on all the payments and have excellent credit. I should also mention that I was forced to rent out my home during back-to-back deployments to Iraq to avoid it sitting vacant and being vandalized like so many empty homes in my neighborhood. I am currently renting an apartment for my wife and I because the renters are still in the home on a yearlong lease. The current renters may be interested in buying the home if the price is fair. Does having renters in the home that currently cover the mortgage impact my chances of doing a comp sale? Thanks for your help
Bills.com
February 19, 2012
Bryan, my research indicates that the VA Compromise sale will result in a derogatory notation that the debt was 'settled for less than the full amount owed' (or some other phrasing to that effect). It is not noted as a foreclosure, as best as I can determine.

I also see no requirements that prevent you from renting out your home, especially given your PCS and your earlier deployment, though you should discuss this with the VA. Normally, VA loans are restricted to use for a primary residence, so there can be repercussions if the VA feels that you are trying to turn the home into an investment property.
Jen P.
Fort Walton Beach, FL  |  February 06, 2012
My boyfriend bought a house at the top of the market in 2007. He now owes close to 170 and the house is worth about 109. At the time of the purchase he was a bachelor, so a 1200 sq ft house made sen, then we got together and planning on staying together. I came wi the baggage of 3 kids and him and I had a baby as well. A 1200 sq ft house is just not working well for our family and we are trying to figure out how to get out from under this house. He makes a fairly decent income and is capable of the payment, but we are starting to struggle since we had to update cars as well. He also has a 800 fico score. Our question is, with good credit and a surviving income, is their any chance of obtaining a short sale from the bank? Is it a good idea to speak with a realtor orthe bank before we move forward with anything? We have no problem with the thought of renting till the market recovers. We just aren't sure how the bank would perciee our renting till the market recovers. We just aren't sure how the bank would percieve our hardship. Any advice would be great.
Bills.com
February 06, 2012
In addition to the facts you shared, the mortgage servicer (the business you send your home loan payments to) will require a financial disclosure that includes your family income, expenses, and other debts. The mortgage servicer will not make a final decision on a short sale until a buyer comes forward with an offer.

All real estate and rental markets are local, so I cannot comment on your idea of renting the property. The downsides of being a landlord are many, but for new landlords there is one more — no history. If you rent the property, you will not be able to count it as income for the purposes of qualifying for a new mortgage.

My advice? Contact the servicer and ask what its qualifications are for a short sale. If you qualify, then proceed accordingly. If not, consider a strategic default.
Cindy A.
Glastonbury, CT  |  January 09, 2012
In January 2009, I was transferred from AZ to CA by the company I worked for. It took over 2.5 years for my condo in AZ to sell and the bank accepted a short sale where I am not responsible for the balance. I remained current on payments for 2 years until I ran out of money to pay the mortgage and rent in CA. I pulled my credit scores at the end of December and they were back to 725. Is it possible for me to get another mortgage this soon after the short sale based on my credit score? Or would I be able to get a mortgage with a co-signer at this point in time or will I need to wait the 2 years that a local mortgage company said I needed to wait?
Bills.com
January 10, 2012
In general, a conventional loan requires a waiting period after a short sale. According to Fannie Mae's selling guide, October 15, 2011, there is a minimum waiting period of 2 years, after a short sale. (Unless there are extenuating circumstances the maximum LTV is 80%). Since your credit score is very good, it is possible that your lender reported the account as paid, and not as settled. If you were not delinquent, then this would also not adversely affect your credit score.
Wayne W.
Setauket, NY  |  October 20, 2011
We have a contract to sell our home and will owe the bank an additional $150K to fully settle the closing costs and mortgage. We feel responsible to do the right thing and pay the bank the amount owed, but will need time to do so. We are agreeable to a promissory note for the full deficit. The bank has agreed to an acceptable interest rate for the new note and has agreed that they will not perform any adverse credit reporting. However, they state that they will describe the new note as "short sale deficiency note". We have a 760 plus FICO score currently and have never had any delinquencies on any debt. My concern is whether simply stating that we have a "short sale deficit note" will negatively impact our credit rating if no other adverse reporting happens. To the contrary, my second question is that with all of the recent foreclosures, does the fact that a borrow has stayed current with a mortgage and agreed to take on and stays current with a deficiency note arising from a short sale not indicate that this person is a good credit risk?
Bills.com
October 20, 2011
In my opinion, a short seller who never missed or was late on a payment should have no negative impact on their credit score. A short seller who was forced to stop making payments as a condition by the mortgage servicer to enter into a short sale agreement should also see no negative impact on their credit score. On the other hand, a short seller that stopped making their payments voluntarily, and was cajoled by their servicer to short sell the property should see an impact to their credit score. Alas, I do not speak for Fair Isaac & Co., Plus Score, or Vantage Score.

The exact words in the notation do not seem to matter. What seems important is how the credit score algorithms weigh the short sale itself. The fact that you have no delinquent payments will weigh in your favor. Allowing the short sale to season for a year or two will also reduce its impact.
Lauro M.
Flagstaff, AZ  |  October 16, 2011
I short sold my house, the short sale was reported on my credit but the credit remained the same, didn't go down. Could it still go down later on? I never stopped paying the mortgage.
Bills.com
October 17, 2011
I assume you mean your credit score did not decrease. I have four questions for you:
  1. How is the short sale noted or described at
    1. Equifax
    2. Experian
    3. TransUnion
  2. There are different algorithms to create a credit score. Was your credit score measured using
    1. FICO
    2. PLUS Score
    3. Vantage Score
  3. What is your present FICO, PLUS, or Vantage score?
  4. When did your short sale close?

Your answers to these questions will help me understand why your credit score has not decreased, and whether it may decrease in the future. Please return here to answer these questions.

Scott M.
Bryant, AR  |  October 14, 2011
Bill - Here is the backstory. My new wife and I are living in a home in AR her ex had financed soley under his name in Aug of 2002. The house cost $185K, my wife put down $40k and he put down $25, balance of $120K. He took out a 2nd in Nov 0f 2002 that she was not aware of for $32K, and then did a refi on the 1st in 2007 taking out another $55k. So first bal now $170, 2nd $33K, $203k total. The home is valued at $285. Her ex did write up a "land agreement" between her and him but it was not recorded until 2010. This summer her ex defaulted on both notes, to sep banks. The smaller local bank started foreclosure on the 2nd for $33K. They are claiming that they are SUPERIOR and that the other bank and all other interests comes after them. Can a second claim being superior if the first bank did a Re-FI after their note? It seems that the bank approving the second would have had to have known about the first when they approved and ran credit to begin with. Why does this little local bank think they have more interest than the bank that is owed more? Does Doing a Re-FI on the first when you have a second make which bank number 1 or 2 during a forecluse proceeding, this little bank thinks they are first refering to the RE-FI date, not the original date. I'd like to propose a short sale and just pay both off and get a new loan but I don't know who or if both would need to agree...as well as probably needing permission from my wife's ex.
Bills.com
October 14, 2011
What you described happens if the junior (aka, the second) never agreed to subordinate when the senior was refinanced. Why? Mortgages or deeds of trust are "first in time, first in line" in terms of priority.

An example to describe my point: On January 1, Owner gets Mortgage A for $50,000, which is recorded promptly by the county clerk. On March 1, Owner gets Mortgage B for $75,000, which is recorded promptly. Mortgage A is the senior loan — the first mortgage — because it is first in time. Let us say Owner refinances Mortgage B in June, and then records promptly. Mortgage B is still in the second position because it was recorded second. Let us say Owner refinances Mortgage A in October, and then records promptly. Mortgage A moves into the second position because it was the last mortgage recorded, and Mortgage B moves into the first position because it is the oldest mortgage — it was the earlier of the two recorded mortgages.

Typically, when a senior refinances, it asks the junior to sign a subordination agreement, in which the junior agrees to stay in the second position.
Robyn R.
Gainesville, FL  |  October 05, 2011
We are busting out of the seams in our starter house and would really like to relocate to the mountains from Fl (both jobs allow for this). We paid $240k for the house in summer 2006, it is now estimated at $170k (ouch!)and we owe $190k. Our lender (local bank) said that we can sell for whatever we can get (after realtors fees $160-$165 we hope) and then have the deficiency balance. They said they would set up an unsecured debt for the deficiency, or we could look at settling for less. I believe that we would qualify for the homeowners debt forgiveness act, so hopefully taxes wouldn't be an issue. What is the best route to take? Should we go for a super long, super expensive unsecured debt? Or try to settle? Which is better financially and credit-score wise? Our mortgage is manageable but only because we work very long hours to make it so. Our family's quality of life has suffered drastically and it's absolutely time for us to get out from under this house. Advice?
Bills.com
October 06, 2011
If you can get the lender to agree to not report the sale as a short sale, if you either agree to a payment on the deficiency balance or settle it in full, that would minimize the damage to your credit report. If a short sale is listed, it will likely impede your ability to qualify for another home purchase loan for a number of years.

Life is often a balancing act, weighing the pluses and minuses of one decision against those of another.

If you decide that moving is the highest priority, then you may have to accept damage to your credit or paying a higher financial cost to repay the debt in full. One factor to consider is the interest rate that the bank would accept were you to accept the balance as an unsecured debt.
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Robyn R.
Gainesville, FL  |  October 06, 2011
Thanks so much for the thoughts. You are the first resource that has confirmed my fear that a short sale has a long-lasting negative effect on credit. Many other resources make it sound like a one-two year problem. Also, good to know that a settlement would affect us (the bank all but promised me that it wouldn't) but that it's still a better bet than short sale. I am very grateful to have found your site and truly appreciate your advice!
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