Ding on seller's credit score from short sale

Asked by Peggy Edwards, Tampa, FL Sat Feb 14, 2009

I'm interested in finding out how much of a credit hit (in approximate points) my seller will take in a short sale where the balance of the mortgage is forgiven by lender.

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Lorie Gould, Agent, Duluth, GA
Sat Feb 14, 2009
Peggy, the ding is close to a foreclosure; however, their rebound will be much sooner. They will actually be able to buy another home within 1 to 3 years where it is 5 years with a foreclosure. The short sale is looked upon much more favorably because it shows responsibility on the part of the homeowner.
Web Reference:  http://www.HomesByLorie.com
1 vote
Michael Cepa…, Agent, Tampa, FL
Mon Feb 16, 2009
First off and MOST importantly, you DO NOT have to be late on your payments to qualify for a short sale, you need only have a valid hardship, so you will not have the initial hit of the typical 80 points for the first late payment and an additional 40 point hit from the second missed payment, and each following missed payment, the point hit lowers. It also depends on how it is negotiated, as it is quite possibe to actually get the file reported as "Paid In Full" and YES this has been done.
To anyone who does not agree, please don't post telling me that this is impossible, as I have done it, and just because you haven't, it is not my fault.
Peggy good luck and happy negotiatiating, because remember this is ALL a negotiation. I have added a link to a blog I wrote, which will give you some more details.
2 votes
Daniele Summ…, , Charlotte, NC
Sat Feb 14, 2009

The best person to ask this question to is a lender. Preferably your clients lender. My lenders all say its a really big hit... somewhere in the 200 - 250 point area, but that's also here in NC and it can differ from lender to lender. But think of it this way... It IS less than going into foreclosure and Lorie is right, they may be able to purchase again in as little as 1 - 3 years.

Hope this helps!

Daniele Summerfield
Wilkinson & Associates
1 vote
Linda Bagley, Agent, Seattle, WA
Sat Feb 14, 2009

There is no way to know what the actual point drop will be. Many factors will be considered to calculate the FICO scores and each bureau will be different.

Some factors will be:

How many payments were missed (rolling lates)?
What is there debt ratio - Do they owe more than 30% on their credit cards?

Additionally, the forgiven debt may not be entirely forgiven. Many sellers are being hit with 1099C's stating the forgiven debt was income. IRS wants paid. If the closed in 2008 they will have already received the 1099C, if the close in 2009 they will see it in 2010 when they go to file their taxes. Is very sad for so many expecting to get a refund.

There are many sites to go to and they may be ok, but you as an agent need to make sure before they sell and find out later that the short sale harmed them for years to come.

My best recomendation is call a Real Estate Tax attorney. I am not an expert in taxes

My best recomendation is call a Real Estate Tax attorney. I am not an expert in taxes

This may be way too much information.

Good luck,
1 vote
Sean Nickle, , Colorado
Tue Oct 5, 2010

Does FICO have category for a short sale? The answer is no. If you have a short sale there are many ways FICO will ding one's credit based on the information about the short sale on their credit report. If there is a 90 day late on their credit report on a mortgage FICO views that as a foreclosure and will penalize it accordingly. If the short sale shows up as a profit loss or paid less than balance owed they will also be penalized as well but as long as there is not a 90 day late it will not be penalized as a foreclosure. A lot people believe that a short sale will not penalize you as much as a foreclosure but that is not necessarily true. It all depends how it is reported. This is not a very popular answer to the real estate industry, however it is an accurate answer. Be very careful of credit advise. It is a very misunderstood industry. If you would like to learn the truth about credit and how the FICO scoring system works there is a book out there that spells it all out.
Go to http://www.cmsconsultants.net, click on the book "Revealed - the Truth About Credit" and enter int he promo code - "seancredit". With this promo code the book will be free, it is a $59.99 value. Hope this helps.
0 votes
Monir Mamoun, Agent, Denville, NJ
Sun Oct 3, 2010
Big time drops, 75 to 200 as one agent said. Basically average around 150 to 160 these days.

Good strategy is to do the short then come up with a simple strategy with bank to have the ding removed upon payment of a $1000 bonus. Works about half the time (6 of of 10 attempts I've learned of).

I have a blog - Top 10 Credit Myths. Link below. It gives more tips. Good luck Peggy!
0 votes
Rick Scherer…, , Tampa, FL
Tue Mar 30, 2010
A short sale can averages about a 180 point negative hit to one's score. It is certainly better than a foreclosure on a credit score where the impact can be significantly higher. Credit is not the only point of concern. There can be tax consequences as well. The Federal government is not taxing the deficiency as income IF the property is their principal residence. However, if the property is a second home or investment home, the deficiecy could becomea tax liability and your client should seek the advice of their CPA.
What most Sellers do not realize is that the deficiency on the sale is RARELY forgiven. Writing in the sales countract that the sale is contingent upon the deficiency to be forgiven is not enforceable per our legal counsel. The sales contract is an agreement by the Buyer and Seller, the lender is not subject to this agreement. The resulting liability can follow the Sellers for years. Most attorneys believe these deficiencies will be sold by the banks to debt collectors, so also strongly advise your clients to seek legal advice as well. As a part of our short sale listing packet, we have a form that states we advise the client to seek legal counsel prior to the short sale listing and are informed by legal counsel of all of their liabilities, as this is beyond our scope as a licensed real estate agent.

I hope this helps, Rick

Rick Scherer & Kevin Reder
Smith & Associates Real Estate
0 votes
Bill Gassett, Agent, Hopkinton, MA
Wed Mar 24, 2010
Every situation is different from lender to lender in a short sale. There are no golden rules. As a ball park you can expect a drop of 75-200 points on your FICO score.
0 votes
Get-smart, , Durham, NC
Sat Mar 7, 2009
everyone claims to be an expert on short sales. if short sales really affected credit as much as people would leave to believe then why does Freddie Mac give some sort of approval of short sales? Freddie Mac will qualify a homeowner with good credit standing a loan or mortgage within 3 years for a short sale versus 5 years for a foreclosure on their credit report.
0 votes
Liane Jamason, Agent, Saint Petersburg, FL
Sat Feb 28, 2009
I can only tell you what I recently saw on a credit report of a couple I was helping rent a home to who had recently done a short sale on their own residence. They otherwise paid all their bills on time and had excellent credit before the short sale - so I am assuming in the 700's. After the short sales they had 550 and 580 credit scores. I actually had thought it might be lower. So they plan to rent for 2 years and hopefully bring up their score in the meantime and buy again after that. It showed up like a credit card charge off when I pulled credit. Hope that helps.
0 votes
Lorie Gould, Agent, Duluth, GA
Sat Feb 14, 2009
Linda, I believe the Government/ IRS forgiveness program is still in place for foreclosure and short sale deficiencies that produce a 1099C which means that the deficiency would not be taxed. I know it was in place for 2008.

Peggy, I would have your client check with their accountant.

With a short sale you can negotiate to have the balance cleared meaning the seller does not have to sign a promissary note for the deficiency. With a foreclosure, the seller could be hit with a deficiency judgement which can be even more devastating.

The bottom line is that a short sale and a foreclosure are both damaging to the credit ratings... the main difference is the amount of time that one could qualify for a new home loan. The few years difference is huge because it could mean the difference between buying in a buyers market and a sellers market. If your clients are looking to purchase a home in the future I would have them contact an experienced loan officer to guide them through the requirements for them to purchase again.
Web Reference:  http://www.HomesByLorie.com
0 votes
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