Home Mortgage Short Sale

[Anonymous]

I am looking for advice on what effect selling our home with a short sale will have on our credit.  Any information would be appreciated.

[llecs]

Welcome to the forums!

I've never studied the topic, but can say with some certainty that there will be quite a bit of damage to your FICO scores. Like with all baddies, the damage will fade over time. It all depends on your credit aside from the short sale and how that short sale reports on your credit reports. It seems like there were a few posts on this within this Board. You may want to snoop around to see some examples.

[Lel]

A short sale can be as damaging to one's credit score as a foreclosure.  It's not uncommon for people to see drops of 100-150 points or more.  The drop in score and the short sale will be noticed by other creditors (especially credit card companies), which may lead to cuts in credit limits and involuntary closing of accounts.

Short sales also can also put restrictions on one's ability to purchase a new home for a couple years after the short sale.

[MattH]

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@Anonymous wrote:

I am looking for advice on what effect selling our home with a short sale will have on our credit.  Any information would be appreciated.

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I'm no expert in this either, but from what I have seen posted in the forums in most cases the impact from a short sale will be similar to the impact from a foreclosure.  Much will depend on how the lender codes it for the credit reporting agencies, but unless the borrower has a binding written agreement controlling how it will be coded any of the likely ways to report a short sale would have a similar negative impact.  I gather it is extremely rare that a lender can be persuaded to code a short sale in such a manner as to hide the economic reality, which is that the borrower did not pay as agreed.  Scoring models used by lenders, such as FICO, are designed to capture such economic reality no matter which of the likely possible codes is employed.  In a short sale as in a foreclosure the lender is getting substantially less* than the principal balance of the loan, the only real difference is that in a negotiated settlement the parties avoid court costs and certain other expenses associated with a foreclosure action.

However, any borrower who is facing the possibility of a short sale should not rely primarily on what people have to say in this or any other Internet forum: few of us have specialized training in real estate law or credit evaluation.  And even if I were a real estate lawyer, I would not be able to form an opinion about a person's case without (1) full details of their situation and (2) experience with the law and procedures in that person's locality.

I therefore suggest, if you have not already hired a local lawyer then you must do so immediately: in situations of this nature delay in hiring a lawyer can easily end up costing you orders of magnitude more than what you would pay him or her.  If you already do have a lawyer, then you should ask him or her what your options are and the possible consequences of each option.  If you already have a lawyer and do not trust the answers you get from that lawyer, then you should find a different lawyer.

*In theory, the shortage could of course be any dollar amount, but in reality I think a borrower whose loan is only underwater by a small dollar amount would typically make up the difference in cash to avoid credit damage, so most short sales and foreclosures would be cases where the loan is underwater by a substantial dollar amount that the borrower cannot afford to pay in cash.