Does a Short Sale damage your credit?

Asked by Anita Harris-Seals, Chicago, IL Tue Sep 6, 2011

This may have a damaging effect on your credit

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, ,
Wed Sep 7, 2011
Dear Anita,

I'm assuming, as an agent, you'd like to be able to keep these Short Sellers as clients. Which means they'd need to buy a new home after their short sale, so I'm going to expand on Shane's response where he says that it would damage their ability to get a new home loan.

To qualify for an FHA LOAN after a Short Sale: You must either wait 3 YEARS from the date sale closed and transferred to new owner. There is (theoretically) no waiting period if the borrower had no late payments on ANY mortgage or consumer debt within the 12 month period preceding the short sale AND they are not taking advantage of declining market conditions, but ... seriously ... that's exceedingly unlikely.

For CONVENTIONAL LOANS, it’s more complicated:
7 years from date sale closed and transferred to new owner or transferred back to bank for new loans with less than 10% down payment.
4 years from date sale closed and transferred to new owner or transferred back to bank for new loans with 10% down payment.
2 years from date sale closed and transferred to new owner or transferred back to bank for new loans with 20% down payment.
2 years from date sale closed and transferred to new owner or transferred back to bank for new loans with 10% down payment and acceptable extenuating circumstances.

As far as acceptable extenuating circumstances are concerned, they need to be documentable and verifiable nonrecurring events that are beyond the borrower’s control and cause a sudden, drastic and prolonged reduction in income. Death of a wage earner and catastrophic illnesses would count, divorce would not (since that is within the borrower’s control.)

So, as a rule of thumb, since it seems unlikely that someone with a 10 or 20% down payment would be ALLOWED to short-sell, most of the time, it’s going to be three years before you can get an FHA loan, and 7 years to get a conventional one.


Matt Bukovy
Sr. Mortgage Consultant
Wintrust Mortgage
Cell 773-416-7107
NMLS ID# 755921
1 vote
Joe Schiller, Agent, Chicago, IL
Thu Sep 8, 2011
damage is relative.. are we talking stopping the bleeding or are we talking lowering your credit score.. the answer ti yes to all of the above
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, ,
Wed Sep 7, 2011
Hi Anita,
It's also important to know that once the credit is rebuilt after a short sale, the down payment requirement could be higher for the borrower, even if they are going FHA. This is at the sole discretion of the underwriter, based on why the short sale took place.

Cecelia Marlow
Chicago Bancorp
Mortgage Banker
0 votes
Nicholas S N…, , Rockford, IL
Wed Sep 7, 2011
One thing to add to Matt's comment is that just because FHA says three years does not mean the investor (Bank that is buying the loan) won't say longer than 3 years.
0 votes
Adam Balawen…, Agent, chicago, IL
Wed Sep 7, 2011
Yes it does but what is more important...... you can rebuild your credit in no time and as long as you avoid Foreclosure.....Short sale is a great option. After one year your score should be dramatically improved (if you pay other bills) and after 24 months it shouldn't be seen on your credit. Do all you can so you don't go to Foreclosure which will stay for long, long time.....on your credit. Also, it is important how many mortgages you have and which banks. The best way for you is to contact local professional. Every situation is different and you will need to analyze what is the best way for you to go.....
0 votes
Matt Laricy, Agent, Chicago, IL
Wed Sep 7, 2011
Yes it does. Once you do one, it's best to contact someone to help guide you through repairing it. In a year, you can be fully recovered by taking the right steps.
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Molly Mosley…, Agent, Columbus, OH
Wed Sep 7, 2011
Yes, for each person and situation is different. I have seen little effect and I have seen a dramatic change in scores from start to finish. There are all types of facts, How the bank records the sale, How many late payments they had if any, did they fall behind on a HOA that put a judgement on them, etc.
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John Potter, , Cook County, IL
Wed Sep 7, 2011
Joe, How did the seller do the correct thing by doing a short sale?
0 votes
, ,
Wed Sep 7, 2011
"Damage your credit" could mean lower your credit scores and/or impair your ability to qualify for financing in the future (particularly mortgage financing). How much a short sale damages your credit would depend on how the creditor reports it to the credit bureaus as well as the mortgage payment history leading up to the short sale action.

If there are a string of mortgage late payments leading up to it, then the credit scores will take a bigger hit as well as some financing options could be off the table for a longer period of time (i.e. FHA financing). If there were no late payments, then it should result in higher scores and not be as restrictive as far as being able to qualify for new mortgage financing.
0 votes
Pacita Dimac…, Agent, Oakland, CA
Wed Sep 7, 2011
Yes a short sale will hurt your credit, just as a foreclosure and a bankruptcy would.

The difference is that it should take you a shorter time to repair your credit history to enable you to buy another home, perhaps in 2 years or less.

whereas it may take you longer --- maybe 7 years --- after a foreclosure or bankruptcy before you can buy again.

Of course, it will also depend on how diligently you work on repairing your creidt by paying down your loans, paying on time, not borrowing or charging a lot more than your income can support
0 votes
Jeanne (Geni…, Agent, Virginia Beach, VA
Tue Sep 6, 2011
Hello Anita, you might want to check this link. I've not used it yet but maybe agents who have already done the HAFA program might join in the discussion and give some tips. Good luck.…
0 votes
Joseph Finne…, Agent, Bethlehem, PA
Tue Sep 6, 2011
How much a short sale affects your credit is an unknown. Even though the seller tried to do the correct thing by doing a short sale they still failed to meet a debt obligation. What typically really messes up a seller is if they stop paying the mortgage. A seller, even if trying to short sale a property, should still be paying the mortgage.

It is almost like a catch 22. How does the seller prove a hardship but yet continue to pay the mortgage

The ideal situation would be they continue to pay the mortgage, prove a hardship and short sale the property, the bank releases them of any future liabilities or debt. Does paying the mortgage always indicate they don't need the short sale. No, if they are using up reserves to pay the mortgage it is just a matter of time until they go broke or bankrupt.


Joe Finnerty
Prudential Patt White Real Estate
Lehigh Valley, PA
0 votes
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