Thanks for making it so clear and concise. All sellers who are considering a short sale ask this question and this explains the consequences to their credit rating very well.
What Effect Does a Short Sale have on my Credit?
Every short sale seller wants to know the answer to this question. Naturally, there is no straight forward answer, but hopefully I can shed some light on the topic. Without a doubt, the impact of a short sale on an individual’s overall credit is less severe than a foreclosure. With a foreclosure, a potential homeowner must wait 5 years to get a conventional mortgage. With a short sale, the waiting period is only two years. For FHA financing, an individual must wait three years to get mortgage financing after a foreclosure or a short sale (where they were in default at the time of the short sale). However, if the homeowner was current at the time of short sale there is no waiting period for a new FHA mortgage (as long as the homeowner can verify that he/she did take advantage of declining values or purchase a home at a reduced price of similar or superior quality). Most homeowners (90%) are delinquent when they start the short sale process, but this is very good news for those that are current and get a short sale approval.
The other related question that goes along with this is what does a short sale do to my credit score? For those 90% of the people that are delinquent when they apply for a short sale, it’s really those mortgage lates and foreclosure action that end up adversely affecting the homeowner’s scores---not the short sale itself. If the mortgage is paid on time throughout the process and the short sale gets approved, then the credit report will simply show “Paid as Agreed, Settled for Less” (as long as the deficiency is forgiven). This by itself should only affect the credit score nominally. There are so many factors that go into a credit score (i.e. trade lines, trade history, balances, number of accounts, etc.) that there is no way to determine “how many points” will my score drop?
In summary, a short sale can affect a person’s ability to get financing in the future. However, it is a better alternative than a foreclosure---especially for those that have been able to maintain a clean mortgage history. With the thousands of homeowners who have already received short sales, and the countless numbers that will get them in the upcoming years, the parameters stated above are likely to change again.
Have a great week!
Mortgage Loan Originator
NMLS ID# 248937
www.RobertRaufHomeLoans.com or my blog: http://activerain.com/blogs/rrauf
(732)223-1630 x102
Since 1987 I have been helping my clients fulfill their dream of home ownership!
Real Estate Mortgage Network Inc.
Real Estate Mortgage Network, Inc. is located at 16 Madison Avenue, Building 2 Suite 2D Toms River, NJ 08753. NMLS #6521. New Jersey Licensed Lender and Mortgage Banker #L041053. Visit www.REMN.com for more information.
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Peg - thanks for putting out this information - everyone always asks and there is no easy way to explain. Nice job!
Great re-blog, Peg. Robert has a good perspective on missed payments vs. Short Sales, and the effects on a Credit Score.
This is great to know, I'll tell people to keep their payments up if they want to keep up their credit!
Peg, Thank you for the compliment of the reblog!
Great post. There are many companion questions to how it affects credit score;
1. how long until credit score goes back up?
2. how does a short affect my ability to get another mortgage in the immediate future, within 2 years, and in the longer term?
3. What causes greater damage, a short sale or being late on payments?
There are more variations of the questions and each answer is specific to the borrowers other debt management habits.
Thanks for your comments, Dave. And, yes, there are many more questions borrowers/sellers have and you have probably heard almost all of them by now!
Good Morning Peg, Thanks for the re-blog. If a short sale is the real last ditch effort to keep a home out of foreclosure then the ding on the credit report doesn't really matter. Getting back on your feet and moving forward is the goal. The credit report will heal over time.
Mary, I completely agree that the main goal is to get the seller out of his situation and be able to move forward.