Does a Short Sale Hurt Your Credit?

Credit crunch Q&A: “Does a short sale hurt your credit?”

Short sales, where properties are sold for less than the existing mortgage balance, have become increasingly popular in the past year.

While short sales are a foreclosure alternative, there’s a good chance they’ll still adversely affect your credit pretty substantially.

Straight from the horse’s mouth: Fair Isaac, creator of the Fico score, says there is no difference between foreclosures and short sales or deeds-in-lieu of foreclosure with regard to your credit score.

In other words, all of these events will show up on your credit report as “not paid as agreed” next to the associated account and have the same impact on your credit score.

Of course, that’s assuming banks and lenders report all of these events in a similar manner.

It also assumes that you are experiencing the same level of delinquency in each situation.

Imagine if you planned to carry out a short sale, but were not behind on monthly mortgage payments; you simply wanted to get out and were still meeting your obligations.

If you were facing foreclosure, you’d probably already have a number of mortgage lates on your credit report, so it’s not all necessarily equal.

Further, you may be able to negotiate with the lender to mark your mortgage account as “paid as agreed” if you choose to go with a short sale or another foreclosure alternative.

In the event of foreclosure, the lender isn’t going to give you any concessions, as it’s not in their best interest to foreclose.

This could explain why many homeowners and mortgage industry participants claim foreclosures and short sales impact credit scores differently.

Some say short sales lower credit scores 70-100 points, while foreclosure lowers your credit score 150-250 points or more.

Of course, the impact of a short sale or foreclosure on your credit score will always vary, based on the rest of the information on your credit report.

For example, if you’ve got light credit history, a short sale will have a greater impact, while those with years of positive credit history may see a smaller hit.

If you do decide to go with a short sale or another foreclosure alternative, try to work with the bank to minimize the credit impact, and make sure you get such promises in writing.

See also: Bankruptcy vs foreclosure on credit.

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