April 10, 2011: Question: Do I need to stop making payments for my bank to consider a short sale? I moved and put my house on the market a year ago but got no bites despite three price reductions. The only way I’m likely to sell it is to reduce the price below what I owe the lender. I want my credit to remain as good as possible, but I worry that if I have to miss payments to get the lender to consent to a short sale my scores will be lower than if I had kept up the payments before selling short.
Answer: Lenders have different policies on short sales, which is when they agree to let a borrower sell a home for less than what is owed on the mortgage. You’ll need to talk to yours about what’s required. But expect your credit scores to take a major hit, whether or not you stop payments first.
A short sale typically will have the same effect on your credit scores as a foreclosure, according to Fair Isaac, the company that created the leading credit scoring formula, the FICO. Fair Isaac recently released a chart showing the effects of various credit score blows, from a missed mortgage payment to a foreclosure or a short sale with a deficiency balance (the difference between the home sale proceeds and what you owe). Someone with FICO scores in the 780 range would lose 90 to 110 points with a single skipped payment. A short sale or foreclosure would trim 140 to 160 points from that 780 score. (You can see the charts at Fair Isaac’s Banking Analytics Blog at http://tinyurl.com/3eze2a5.) Your score will plummet that far whether or not you stop making payments before the foreclosure or short sale.
You might be able to reduce the damage from a short sale if you can persuade the lender not to report the deficiency balance to the credit bureaus. Short sales without a reported deficiency balance would trim 105 to 125 points from a 780 score, according to Fair Isaac. But lenders that have been cajoled into a short sale often aren’t in the mood to grant you additional favors.
There are some advantages to a short sale over a foreclosure. One is that you can start the long road to credit recovery sooner because foreclosures usually take much longer than short sales. The other bit of good news: You can qualify for another mortgage faster. Lenders typically will consider you for a home loan two years after a short sale, versus a wait of up to seven years if you let the current lender foreclose.
3 thoughts on “Short sale disappears from credit score far sooner than foreclosure”
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A foreclosure can keep you from getting another loan, but it may or may not. It depends on the lender and the borrower.
At the end of this article you say that a foreclosure can keep you from getting a loan for up to 7 years. Where do you get that number? I don’t think that is right, it would seem that if a person can qualify for a loan after bankruptcy without waiting 8 years, there shouldn’t be any longer wait for foreclosure. Would you have a citation for that assertion?