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Short Sale Affects Credit Score - how many points do you lose?

Author: Jessica Bennet
Community Mentor
Ask Jessica
Posted on: 29th Dec, 2005 11:49am
A Short sale is where the lender agrees to accept an offer for a house that is less than the amount owed on the mortgage. Short sales happen when the owner is behind or about to become behind on their mortgage and want to avoid foreclosure. Moreover, if the home is located in an area where home prices are on a decline, then it may be sold off for less at a price that isn't enough to cover the loan balance.

A short sale is less damaging to your credit score than a foreclosure. Your FICO score will drop by 75-100 points if you do a short sale, compared to 250 if you get a deed-in-lieu.

By attempting a short sale, the borrower can avoid foreclosure and a decrease on their credit score. Moreover, a short sale may be faster and less expensive compared to foreclosure.

How to negotiate for short sale..

In most cases, borrowers are approved for the sale only after they have been in default and the lender has served them with a Notice of Default. At times, the borrower has the option to negotiate a short sale in case he's unable to pay off the loan and intends to move out. In this case, the borrower should provide the lender with a hardship letter stating why he cannot continue to pay his mortgage and why a short sale is the best option for both parties. It's better to take help of a real estate agent or attorney to negotiate a pre-foreclosure sale with the lender's Loss Mitigation Department.

Posted on: 29th Dec, 2005 11:49 am
My credit score is 550 and I am selling a house. I owe 50k and I am looking to do a short sale for 45k should. How does short sale affect credit score.
Hi Michelle,

Doing a normal foeclosure will not help you in any way. You will still be liable to pay off the second loan. Even if the second loan is charged off to a collection agency, you need to keep makng the payments to the agency.


Posted on: 30th Apr, 2009 07:10 am
We are currently thinking of a short sale due to a relocation to another state. If we short sale but do not miss any payments (the relocation will cause a financial hardship, current loan + renting a home in new state) how badly will this affect our credit if we do not miss payments but have a "debt settled for less" on our credit?
Posted on: 01st May, 2009 11:59 am
Hi john,

A short sale lowers your credit by almost 70-100 points. If you do not have any missed payments, it will definitely be good because if you have any, it will drop your credit score further.
Posted on: 04th May, 2009 02:06 am
i am considering on a short sale! i own other properties. if i short sale on one will it effect my other properties?
Posted on: 04th May, 2009 08:29 pm

If one of your properties is foreclosed on t might affect your other properties. The lender cannot foreclose on your other properties, but they can get a judgment against you for the non-payment of deficient money and can put a lien on your other properties.
Posted on: 06th May, 2009 04:38 am
Help! I bought my house in 2005 for 75K more than it's worth now. I was single when I bought, I am now married with two kids. The house is only a two bedroom, so we decided to rent it out and buy another. Now that we have moved into the other, the renters who where giong to rent the first house from us backed out. Now we are stuck with no one else wanting to rent it (Agent says we can only get about 1000/month (mortgage is 1600) I can't take that kind of a monthly hit, and like I said it's been a month with no new renters. I am now faced with nothing to do but a short sale.

My credit score is pretty good (730) My biggest fear is if this process takes 4 months, I don't know how to stay current on both loans. Is there a general rule of thumb as to how many points my score will drop if I am one payment late every other month on the first house? I know the short sale will drop me at least 80 points. Just trying to get a handle on how much more it will drop since I don't have 6K in reserves to pay both notes.

As far as paying taxes on the 'ghost money' is it generally due all at once, or can a payment plan be set up? Since I have the loan on hte other house, without the financial means to immediatly pay it off, does that make me insovlent?

Lastly, when the lender makes you pay back the defficiency balance, are the loans usually interest free? What are the terms? 30 years, or less? Will I have a lein put on my current property until the debt is paid, or since the loan for the defficiency is unsecured, does it not matter?

Thank you so much for your help!
Posted on: 10th May, 2009 06:44 am
had a few more ?'s to add from above. Since my first house was my primary res. for the last 4 years, but is not longer, does this make me not qualify for the obama 'no tax' law on the deficincy income?

How do I find out if my mortgage is recourse or non recourse
Posted on: 10th May, 2009 06:52 am
I just bought another house what if i cant rent or maintain both payments
Posted on: 17th May, 2009 01:32 pm
hi mashortsale,

there is no rule of thumb as such as as to tell you how many points the credit score will drop due to the short sale. generally, the score drops by 80-100 points, but if there are late payments they might drop the score further. if you cannot pay off the tax on the deficient amount at a time, you can pay it off at your convenience. but until it is paid off it will remain on your credit report. if you do not pay it, the lender may put a lien on your other properties. as you do not live in the property it will not be considered as your primary residence and you may not qualify for the tax relief if the deficiency is forgiven by the lender.

hi anonymous,

if you cannot afford mortgage payments on both the houses you can request your lender to modify the loan. through modification, your monthly payments can be reduced. this will help you be current on your payments. you can also refinance to consolidate the two mortgages so you have to pay only one single payment for both the loans.


Posted on: 18th May, 2009 02:44 am
I recently just sold my house on a short sale. I had a 1st and 2nd mortgage and due to divorce and the fact that my home was now only worth 80% of what I purchased it for I had to do the short sale. After the long and I mean long ordeal of the short sale process and the mortgage company who shall remain nameless but essentially screwed up my file from day one; I finally closed in APril 2009. My question is I ran my credit with all three agencies to see what the damage of the short sale did to my credit and I was dumfounded to discover that the mortgage holder had three separate things reported to each agency none of which were correct. I've been calling and writing emails to the mortgage company to get someone to correctly report the short sale for all three agencies but again I am getting no where, what other steps can I take to get this taken care of ?
Posted on: 28th May, 2009 07:28 pm
Hi texasmom,

You'll have to dispute the incorrect information on your credit with the credit agencies. If you're getting no help from your lender's end, you'll have to do it on your own. I suggest you to send letters to the bureaus disputing the wrong information given on your credit report. You'll be required to send them appropriate documents as proof of your claim. They are supposed to respond to your request within 30 days according to the Fair Credit Reporting Act.
Posted on: 29th May, 2009 06:17 am
My credit score was 670 about 3 months ago. I went to my bank to get short term loan and my bank advisor told me that my credit score has dropped to 657 beacuse I had 2 enquiries 2 times after it was 670. Please can you tell me, how many points someone drop per one enquiry? Thanks
Posted on: 01st Jun, 2009 06:18 am

For every credit enquiry, the credit score drops by almost 5 points. It's the hard enquiries (the enquiries that arise from your application for a new credit) that cause a drop in your score. Soft enquiries do not cause a decrease in your credit score.
Posted on: 02nd Jun, 2009 04:16 am
I filed bankruptcy in 2007. I included my home in the bankruptcy. My atty and the bank agreed to move the home out of the bankruptcy and agreed to not come after me for any deficiencies. I have two signed orders stating the bank waives any deficiences. The bank proceeded with preforeclosure and then filed a lawsuit. I just had two offers on the house and the bank is considering them. The lawsuit is on hold. My question is, if the short sale goes through how will it affect my credit score when I have the agreement of the bank not to come after me for any deficiences?
Posted on: 06th Jul, 2009 04:59 pm
Hi KH,

The deficiency will not affect your credit score. It is the short sale that affect your scores. If the deficient amount is forgiven by the lender, your credit will not be hurt, but you will have to pay taxes on the forgiven amount. This forgiven debt is seen as an income by the IRS and is hence taxable. However, you may claim exemption from the taxes under the Mortgage Forgiveness Debt Relief Act.


Posted on: 07th Jul, 2009 05:20 am
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