November 23, 2011

Impact of Short Sale on Credit Score

A short sale is when you make an agreement with the bank where they allow you to sell your home at market value even though your mortgage balance owed is more then that.  The bank basically takes the loss in this manner as opposed to having to foreclose and then sell it themselves.    One benefit of short sale cited by many is that it is not supposed to hurt your credit score as badly as a foreclosureOCShortSaleNow makes it sound pretty good  saying : "Following a successful short sale your mortgage will be reported on your credit score as either paid or negotiated, lowering your score as little as 50 points and affecting you for only 12 to 18 months. "   An article on the topic is much less optimistic : "The ding on credit will show up as a pre-foreclosure in redemption status, Steep says, which will result in a loss of 200 to 300 points."    Thats a huge difference in impacted given by those two sources.  The difference between 50 points and 300 points on a credit score is gigantic.   How much does a short sale really impact your credit score??

First of all we need to know a little about how the short sale shows up.   A QA post on the Experian website points out that "The term “short sale” does not actually appear in a credit report. So, the important concept to understand before you agree to your lender’s terms is how the mortgage loan will be closed and reported in your credit history."

For a good answer, lets go to the source.  This article on the FICO website cites different ranges of impacts to scores for foreclosures shortsales and the like.  They have a couple tables there showing numbers.  You can read their article for the source.   I consider the information from FICO to be the definitive answer on this topic since they are the ones that make the actual FICO credit scores.   If anyone can tell us the right answer it would be FICO.

FICO's info tells us that the actual hit to your credit score from a short sale will depend on where your credit score starts in the first place and how the short sale is reported on your credit report.   

If your score is lower to begin with then the hit to your score won't be as bad as you'll have less to fall.   For someone who starts with a credit score of 680 the impact from a short sale is 50 to 105 points.   If your score is much higher at 780 level then it could drop 105 to 160 points.  

When a short sale is reported with a deficiency balance that will hurt your score more than if the short sale is not reported with a deficiency.    From the numbers on the FICO site the difference between deficiency and no deficiency is 35 points.

The FICO data also shows a range of 20 points for any specific situation.   The impact to someone might vary 20 points depending on the exact specifics of their situation.   The credit score formula is pretty complex so you'd have to look at all the other factors involved.   I'm not sure how or why the impact from a short sale could vary 20 points but maybe if you have great credit otherwise the single short sale won't ding you nearly as much or maybe the opposite is true. 

Ultimately you'll end up with a credit score in the low to mid 600 range.   I'd assume your credit score will be 600-650 after the short sale is done.

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