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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.
I have 2 mortgages. My first is for 150 K, my second is for 100 K, My house has lost it value and is currently worth aprox 180 K. Which lender approves a short sale? They are differnt lenders.
Posted on: 12th Jul, 2009 06:51 pm
elmo, i suggest you broach the subject with both lenders, as your approximate value isn't necessarily going to end up being a sales price. even if it does, you'll have expenses of closing (real estate agents' commissions, tax, legal, etc.). although your first mortgagee ought to be in good shape, the second mortgagee can expect to receive very little, if anything, for their loan.

if you work with an attorney now, i'd hope that the attorney will have some experience with short sales and can advise you further. barring that, you will want to find a realtor who is conversant with short sales - someone who (again) can advise you.
Posted on: 13th Jul, 2009 08:18 am
Hi everyone. If you are upside down In your house and can not make your payments do not kill yourself stressing about it. George bush passed a lwa that is on effect till 2012 that If you foreclose on your primary residence the banks can not come after you at all for any remaining money owed. I have more then 5 friends foreclose on advice of a finacial advisor because they were over 100k upside down. Also the credit only gets ringed about 120 points or so on foreclosure not 250. Lots of wrong advice on here and don't let it scare you if you are in a bad spot walk away and I'm 2 years you can be approved for an Fha loan no problem. Short sale is worse to my knowledge because the banks can try and come back after u for remaining balmce. ( not 100% on that though) the banks were given billions in stimulous money to help home owners instead they are making you run through hoops to try and get you to fold to there rules. They banks created this mess they can fix it or get stuck with 100s of thousands of foreclosures.
Posted on: 13th Jul, 2009 05:06 pm
hold on there, broker: "if you are in a bad spot walk away" isn't going to work for everyone...and "i'm (sic) 2 years you can be approved for an fha loan no problem" is blatant foolishness. no problem? do you realize how tight lending has become all across the country? yes, i recognize that there are a pocketful of lenders who'll say "no problem" to everyone that comes in the door, but are these going to be favorable? fha may be more forgiving than fannie and freddie, but that's not going to make underwriters take on excessive risk for their lenders.

i just can't get over "no problem" - it's as if it never happened, right? please.
Posted on: 14th Jul, 2009 07:40 am
Our bank said that a short sale would only affect our credit score 40-50 points, while a foreclosure would drop the credit score to the low 400s. Were they sugar-coating the short sale drop??
Posted on: 14th Jul, 2009 10:52 am
Hi turfbird,

A short sale indeed has a less damaging effect on your credit than a foreclosure. As far as I know, a short sale drops your credit by 75-100 points, whereas a foreclosure drops your score by 250 or more points. However, if there are late payments prior to the short sale, you can expect your credit to drop more than 100 points.
Posted on: 07th Aug, 2009 12:43 am
Does it apply to land (property) only. There is no dwelling on the land. I have a mtg on land that has gone down in value by 3/4. HELP
Posted on: 10th Aug, 2009 06:09 am
it is applicable to all type of properties.
Posted on: 10th Aug, 2009 10:47 am
looking to short sale due to transfer(u.s. govt employee). have been getting mixed info regarding whether i need to miss a payment or not in order to get attention of the bank. have not missed payments. house is severly upside down with an adjustable due in 5 years (no way house comes back for possible re-fi). I realize short sale will damage credit but also seems like only option. just dont want the short sale to drag out. any advice would be appreciated.
Posted on: 01st Oct, 2009 09:38 pm
I have recently put my house up for a short sale. I have one bid into my mortgage company for consideration. I am continuing to make the mortgage payments while I await an answer. I know that the short sale will effect my credit score I just don't know how much. Before this happended my credits scores were all in the 800's. Any answers.
Posted on: 03rd Oct, 2009 02:35 pm
If you continue to keepmkaing payments and go forward witht eh short sale process then you are probably lookign at 50 - 100 poitns. But it should be atleast 50 points

But if you stop makign payments then ti is a different ball game, it can go down pretty bad

Make sure to do what you are doign now, and once the bank compeltes the short sale, then you shoudl be ok

Also remember if you do not negotitate the deficient amount this upfront, they may come after you for the deficient amount

So makesure ti is covered
Posted on: 03rd Oct, 2009 05:07 pm
you need to continue to make payments. in that case you will get hit in the range of 75 - 100.

But you will be answerable for deficit amount
Posted on: 04th Oct, 2009 01:27 am
How can they come after me for the deficit amount when I soon will not be able to pay the mortgage. How can the come after you for something that is not a capital gain?
Posted on: 06th Oct, 2009 05:17 pm
To legalbeagle,

Had there been a capital gain from the sale of the house, IRS would have come after you for the taxes. But since this is a short sale and there will be a deficiency, it's the lender who will come after you. But they can also forgive your deficient amount and may choose to not come after you. It's entirely up to your lender which way they'll go.

To kriskay,

It is not advisable that you should miss payments in order to get approved for a short sale. The short sale will affect your credit negatively for sure. Now, on top of that, if you miss your payments, it is further going to affect your credit scores. You have a strong reason to prove to your lender why you need to short sell. You're short selling not because you cannot afford the payments, but because you need to transfer for the sake of your job. This reason ought to be enough for your lender to approve the short sale. You can write them a letter, providing proof to your transfer and requesting them to accept the short sale.
Posted on: 07th Oct, 2009 05:22 am
Just to add

If the lender forgives the deficient amount, the amoutn is genrally taxable. Lenders would normally send you 1099. But the current law protects you from it till 2012. You will need to file it when you rpeort the taxes, btu you will nto eb taxed
Posted on: 09th Oct, 2009 11:01 pm
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