How does a short sale affect a credit score?

Asked by Gena Riede, Elk Grove, CA Mon May 21, 2007

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18
California M…, Agent, Oceanside, CA
Tue May 22, 2007
BEST ANSWER
A short sale does not have to affect your credit score and yo don' have to be delinquent to complete a short sale. I have negotiated 3 short sales where no adverse action was taken by the banks. the customer offered a lien on another property for the balance due and continues to make payments on that balance. Short sales, where the seller "walks away from the debt" will have a negative impact on your credit score.
Web Reference:  http://brian-brady.com
4 votes
Maureen Fran…, Agent, Birmingham, MI
Tue May 22, 2007
In order to obtain a short sale from a bank, one has typically fallen behind on payments. That alone will impact a credit score. Read more about it in the article below.
4 votes
Jackie, , Seattle, WA
Tue Oct 9, 2012
This article goes into more details - http://practicallist.com/real-estate-short-sale with fico and fannie mae data and documents you can download to use as a check off list when doing a short sale.

Most will be hit with 30 - 90 day late payment hit plus a short sale hit. Could be upto 300 points (thats as much as a foreclosure) Some seller get away with only 100 points which can be restored in about 2 - 3 years. For most people its one of the best options if their under water.
2 votes
Debra (Debbi…, Agent, Livingston, NJ
Mon Oct 4, 2010
The good news is, Gena, that since you asked this question over 3 years ago - your credit may already have improved!
1 vote
The Mulhern…, Agent, Fairfax, VA
Thu Apr 30, 2009
It depends on how the short sale is negotiated. The key to getting the best result is to have your agent negotiate out a "Paid as agreed" or "Paid in full" reporting to the credit company. If this is how it is reported, then the impact is minimal. The missed payments however will hurt. Here is a link that I use to show our clients the differences between a foreclosure and a short sale and why it is always worth trying for a short sale.
http://www2.topproducerwebsite.com/users/34903/downloads/Sho…

Jimmy Mulhern
http://www.homesinvirgina.net
1 vote
Get-smart, , Durham, NC
Sun Apr 26, 2009
a short sale has less negative impact on your credit score than a foreclosure. what should concern you more is the missed mortgage payments.
1 vote
Steve, , Rohnert Park, CA
Wed Nov 12, 2008
The only people who can accurately tell you impact on your credit score is Fair Isaac, who created FICO scoring and keeps the formula quite secret. Per their consumer site (myfico.com) there is effectively no difference in how they score a short sale versus alternatives (see link). I would suspect you'll take a hit on your credit, though most of the damage is likely already done via the string of 120-180 day past due records on there already.

As to when you can buy again, it's anyone's guess. I will say you're in good company as there's no shortage of people facing situations just like yours. And there are still far too many homes in the U.S., as will be the case for the foreseeable future. I would suspect a couple years down the road when the housing market bleeding has slowed mortgages will be issued less by virtue of a three-digit credit score rank with a 7-10 year memory, and more by a credit score reflecting two year's past performance, your debt and income/job history/stability.

Given the housing implosion continues onward, I would doubt you'll be able to secure a mortgage from anyone other that government-backed mortgage (too much risk for private entities, who can't sell mortgages at market rates due to crazy forced lending from government-sponsored competition) -- and I don't believe Fannie/Freddie is an option for you at the moment with a recent short sale. Rent in the short term, kill as much debt as you can and stockpile down payment cash the next couple years. You'll most likely be in a good position to buy a house at prices significantly lower prices in a couple years.
1 vote
Kenny, , Illinois
Wed Nov 12, 2008
I think I should also add that I previously had excellent credit. I was with the same construction company for 13 years and was laid off in March. My pay had decreased approx. $16,000 a year from 2005 to 2006 and even less in 2007. We completed building are home in June of 2005. The housing market seemed to tumble the day we moved in. I have a co-signer if needed. I would rather not use him, but if this is the only out to buy a home at a decent interest rate that is what I will have to do. I wanted to give you a little background on me so you did not think I was a deadbeat that bought a house I could not afford and am now blaming everyone else. I blame noone but myself. I did not buy into a ARM loan or anything like that. I had a 30 year fixed at 5.75%. I now work for our local school district with excellent benefits and $50,000 a year. It is still alot less than we are used to making but our baby is now 14 months old and my wife will be back to full time teaching next year. She is a part time assistant now. Thanks again.

Kenny
1 vote
Aaron Wheeler, Agent, San Francisco, CA
Wed Aug 1, 2007
Depending upon the circumstances, it will be reported as "settled for less than amount owned" and that will have an impact on the credit score. It is hard to say how many points it will drop because that depends upon so many factors.

The impact will be significantly worse if there has been a series of 30 day, 60 day, or 90 day delinquencies leading up to the short sale.
1 vote
Monir Mamoun, Agent, Denville, NJ
Sun Oct 3, 2010
Yes, it typically drops 75-200 points. The higher the borrower's initial credit score, the steeper the drop.
0 votes
Steve Vennem…, Agent, Pine Springs, MN
Sun Sep 19, 2010
If you can get your mortgage company to state paid in full your credit shouldnt take too big of a hit. Your real estate agent should be able to help you in writing an agreement to propose to the bank. Its alot better than a foreclosure on your credit.
Web Reference:  http://www.760credit.com
0 votes
Joeqpublic, , Texas
Mon Aug 3, 2009
This is an article from May 2009.

The guy that they quoted in the article worked for Fair Isaac and/or the credit bureaus for a long time and is not in charge of the Education Dept at Credit.com.

He says a short sale DOES hurt the credit score. Please read this before taking anyone's advice:

http://money.cnn.com/2009/05/08/pf/saving/real_estate_willis…
0 votes
Kenny, , Illinois
Wed Nov 12, 2008
I just completed a short sale on my home. I signed a promisssary note for $15,000 with Countrywide to be paid back in $100 monthly increments for approx. 13 years. There is no penalty for an early payoff on the note. Countrywide assured me that my credit report would read "settled" similar to a settled credit card debt. i did not make payments on the home for about 10 months so obviously that will hurt my credit, however, at last check (3 months ago) my credit score was 686. I have never been late on any other payments (credit card, car payments, insurance, eveything). If anyone has anything to add I would appreciate your knowledge. I want to know when I will be able to buy another home, with or without a co-signer. Thank you very much.

Kenny
0 votes
Janice Spenc…, , 94531
Mon Aug 6, 2007
Just a follow up to Mario's answer. There is legislation under way that, if passed, would no longer require that banks 1099 borrowers for the amount of the debt forgiven in a short pay transaction involving their primary residence, so then the borrower would not need to report it as income. I'm not sure when this legislation will actually come to a vote, but perhaps they'll consider making it retroactive. Our company has a policy of informing Sellers in this situation of all their options as well as the potential tax consequences, and we recommend they speak with their tax prepairer and a bankruptcy attorney.
0 votes
Mario Pinedo,…, Agent, Cupertino, CA
Sat Jul 21, 2007
Another issue that will come up is how the short of the loan is reported on your income taxes. Please consult a competent tax preparer. Although what I know is that whatever money is shorted, will be considered income by the IRS.
0 votes
William Boone, , 95678
Thu May 31, 2007
Hello tough question I have been trained in short sales and done many transactions with them. Credit score can lower on average 50 points and be reported for approx 18 months. It will show as a pre forclosure settled which compared to a full foreclosure not bad.
Web Reference:  http://www.wboone.golyon.com
0 votes
Joe Batten, , Naples, FL
Fri May 25, 2007
It will affect your credit only if you dont make the payments. Which most of the time that is why a person is in a short sale. You can bet that the bank is going to get their money one way or another, its not a get out of dept free card.
0 votes
simplenickel, Both Buyer And Seller, San Francisco, CA
Mon May 21, 2007
YES. A short sale is considered a type of foreclosure and will negatively impact your credit score. However, there are benefits to a short sale over a foreclosure, namely you avoid the foreclosure process and get out from under the mortgage.
Web Reference:  http://www.flippingpad.com
0 votes
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