We recently sold a Short Sale where the home owners kept asking “what happens to my credit if I do a Short Sale”!? The short answer (no pun intended) depends on how your lender reports the Loan Settlement to the credit agencies. And some lenders have started reporting the loans as “satisfied” which would have little or no impact on your credit. What’s clear however is that with Short Sales as an option to Avoid Foreclosure will have much less impact on your credit than your other options listed below.
According to a document issued by Fidelity Title company on , a Successful Short Sale can only impact your credit score for up to 18 month by only 50 points. However a Foreclosure will drop your credit by 250 to 300 point while remaining on your credit history for at least 3 years. According to the same source, future employment prospects of owners are impacted much more critically by a Foreclosure vs a Short Sale.
We briefly cover the other 4 options before examining the impact of the Short Sale on the sellers credit score.
1) Loan Modification: Loan modification is an option that some lender modify the terms of the existing loan to help home owners afford the monthly payment.
2) Deed in Lieu: Deed in Lieu is an option for owners who agree to transfer the title of the property to the lender instead of a lengthy foreclosure process.
3) Bankruptcy: This option provides the home own to use the courts to settle with their creditors and the lender on their home. .
4) Foreclosure: One final alternative to Short Sale is Foreclosure where the lenders use either the courts in Judicial States or the Trustee Sale (Trustee States like California) to remove the property from the possession of the home owner and sell it at Auction.
According to our Lending Expert Robert Heath of BayView Residential, the owner’s credit score could drop anywhere from 110-160 points depending on how the loan status is reported to the Credit Agencies. But these are only estimates since every borrowers credit history is unique to that individual and depending how the deficiency judgement is reported to the credit agencies the impact on their credit score will be different.
Suffice it to say that lenders are approving owner one day after they close their Short Sale. In fact, our last blog one such buyer commented about the blog that she was able to purchase a home within a few month of her Short Sale. That’s why you are seeing Strategic Short Sale where home owners who are convinced that their home will never recover in value, are deciding to Short Sale their home and purchase something that has much better chance of appreciation.
However, home owners should contact the Dept of Housing and Urban Development (HUD) to explore all their options using a HUD Counselor. Also feel free to Contact Us if you have any questions on your short sale.