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.