How Does a Short Sale Impact the Homeowner’s Credit Report?

The credit implications for a short sale, are very different for those voluntarily selling their property and those forced into foreclosure.  If the property owner voluntarily selling the property can pay off the amount owed out of pocket by using assets already owned there should be no credit implications.  If the property owner needs to take a new loan from a bank in order to make up the difference from the short sale, then the credit implications would be the same as the credit implications of taking out any loan.  In fact, sometimes taking out a loan can improve a credit rating. Whether the new loan raises a credit score or lowers a credit score, most likely the new credit score will not be drastically different than the property owner's credit score before the short sale.

However, if the short sale is due to foreclosure, the property owner's credit could be negatively affected.  Even when the bank chooses not to sue, the foreclosure can end up showing up in credit checks because it is a public record. Therefore, letting the home go into foreclosure without a short sale will eliminate any opportunity to negotiate how or even if the short payoff shows up on your credit report.
A short sale doesn't directly damage a credit score if the bank accepts the offer and doesn't report negative credit behavior. Typically, any payments missed leading up to a short sale remain on a credit report for several years. Lenders factor that into decisions to issue new loans. Foreclosures also remain on credit scores for seven years, making it more difficult to get standard financing. Borrowers may have to pay higher interest rates. The impact on credit scores diminishes over time.

Therefore, short sales cause less damage to credit scores, raise fewer legal issues and hold fewer stigmas than losing the house to the bank.  Most of the time, a short sale shows simply that a debt is―satisfied.  But theoretically, a short sale could reflect on the credit report as―settled for less than the full balance.  Such a designation is a negative mark on your credit report, though it wouldn’t hurt your credit nearly as much as a foreclosure would.

HINT: Attempt to require the bank to use no or non-impacting credit report notations during short sale negotiations.

Don Mailey

RE/MAX Results

952-212-0968

Don@DonMailey.com