What is the Impact of a "Short Sale" on My Credit Report?
I hear from a lot of people (even professionals) that negotiating a short sale with your lender would prevent a negative entry in your credit report. Is it true?
The short answer is No. So, where are these rumors coming from? In my opinion, they stem from the fact that having a foreclosure entry in your credit report is very detrimental. Thus, if you can prevent the lender from reporting a "foreclosure" entry to one of the credit score reporting companies, you have avoided the worst case scenario. But the reality is that you have not prevented a negative entry in your credit report.
So, why is it that a short sale is negative? Think about this - when your lender agrees to "short sale" your house, they are agreeing to take a loss. This loss is the difference between the amount owed and the proceeds from the sale of the property. This type of transaction, in most cases, is reported as "settled", which means that you reached an agreement with your lender to repay part of the total amount owed. Compare it to a "paid" entry posted when a borrower has made all the payments on time or paid the full amount owed. It is unlikely that a lender taking a loss would report the transaction as "paid".
Obviously, having a "settled" entry is a lot better than having a "foreclosed" entry in your credit report but it is still a very negative entry because a mortgage is involved.
Making a late mortgage payment is, in itself, an event that would cause a negative report from the lender. Therefore, two possible events related to short sales can reduce your credit score:
The real benefit of having these two types of negative entries is that the effect is not as lasting as a "foreclosure" entry. Experts say that a foreclosure entry would stay in your credit score report from 7 to 10 years (worst case scenario). Having a long term negative entry in your credit report will, in most cases, prevent you from buying big ticket items among other things ...
What can you do once you have a short sale entry? Start working toward rebuilding your credit by paying your bills on time. That includes every account you make payments on a regular basis. For instance, utility bills, cell phone bills, credit cards, car payment, etc. All of these institutions can report negative entries.
July 31, 2008 Update
Even though credit reporting companies (Experian, Equifax, and TransUnion) do not disclose how they rate different events, it has been reported that homeowners having a foreclosure in their record would take a hit of 250 to 280 points. For example, a homeowner with a FICO score of 680 could end up with a score as low as 400 points. Currently, "short sale" transactions are taking a hit of 80 to 100 points.
Please remember that these FICO score hits are estimated numbers, it does not represent the rule used by credit reporting companies to rate "short sale" or "foreclosure" events.
Also, consult with a licensed loan officer or a licensed real estate agent for the latest rule changes regarding foreclosure and short sale effect on credit. As banks and the government deal with the financial crisis, rules change almost on a weekly basis.
Comment Notification
Subscribe to this post's comments using