Information on effect of short sale on credit score

BILL'S ANSWER

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 (108)

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?

(0)

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.

(0)

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?

(0)

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.

(0)

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.

(0)

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.

(0)

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.

(0)

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.

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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?

(0)

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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Tanya T.
La Puente, CA  |  October 04, 2011

My husband and I have rented out a condo nine months ago, used to be our primary residence. However we still have to cover additional $400 after the rent every month. Its current value is about $150k while we owe $196k. We are current on the payment and seek for an opinion. We may keep paying until the market is up but don't know when. It doesn't make any senses to drain the money. A short sale is another option but the negative impact on the credit is a concern. The loan is under my husband only and he indeed concerns about his credit as he owns a business. Please advise. Thanks.

(0)

Bills.com
October 04, 2011

There are no perfect, pain-free solutions to the situation you described. Foreclosure and short sale have negative consequences for a homeowner's credit score.

If the residential real estate prices in your area are rebounding, then you may want to hang on until you can sell the property at break-even. However, if the housing prices are going nowhere but sideways or down, then consider a short sale or allow a foreclosure now.

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Kerry R.
Hyattsville, MD  |  September 29, 2011

You do not need to be behind to short-sell. In addition, you just need to show a hard-ship, and they come in many different forms. You need to find a realtor that has done a lot of short-sells before.

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Todd M.
Mentor On Lake, OH  |  September 26, 2011

My wife and I are current on our mortgage, but we are looking to move out of state for work. We had a realtor come to the house to give us what they thought we could sell the house for. She said 75k-80k at the most, most are going for 60-70k in the nieghborhood, but are in need of updates, where ours is updated. We owe 95k on the house, so we are about 20k underwater, and do not have anything in savings to cover the difference. what is the best option to sell the house. is a short sale going to hurt us that bad since we are current on the payments. we are not struggling we are just looking to relocate.

(0)

Bills.com
September 26, 2011

Short sales can be great deals where the home seller, the lender, and the buyer all make the best of a bad situation. Short sales can also be opportunities for mortgage servicers to needlessly harm a homeowner's credit score, drag out a sale for no apparent reason, and hold the homeowner and buyer hostage while it invents costs and expenses at the 11th hour it expects others to pay. Unfortunately, I am not being cynical as I have first-hand experience with unscrupulous mortgage servicers.

The devil is in the details. Contact your mortgage servicer, explain your situation, and ask for a contract to sell the property as a short sale. Before you sign the contract, take it to a lawyer who has experience in real estate or contract law. Ask if allowing a foreclosure is a better deal for you given the laws in your state, and act accordingly.

(0)

Eric M.
Modesto, CA  |  September 28, 2011

Todd, It is wise to listen to the Bills.com advice. My wife & I just completed a short sale a couple of months ago where we were current on all of our payments and relocating over 100 miles for a job relocation. As a result we had to sell our home because we were moving. Even though we made all of our payments and everything was current, we just discovered the other day that my wife's credit dropped from 800+ to nearly 600. The short sales affected her credit score by 200 points. Also, some previous experience that we were told was that short sales are not as bad as foreclosures and if the short sale was due to job relocation, then we should be able to buy a new house right away as long as we kept everything current. After the short sale, all of the banks we spoke with told us that they treat a short sale no different than a foreclosure and we will not be able to borrow for a new house for at least 2 years.

(0)

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