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What SHOULD the Credit Score Ramification Be for Short Sale Sellers?

I read with interest an article that suggested that the victim of a short sale would only have that credit impact for nine months.

As opposed to the 7-10 year credit commitment of a foreclosure.

Because that seems pretty short term in ramification (realistically) for a short sale (even with timely payments up until the closing), my digging (which was admittedly contrary in findings, one to the next - NY specific) begged the question: what IS reasonable for a seller to edure from a credit standpoint if the result of their actions unloaded the bank debt, a bit short?

Because the bank made the same error that the home buyer did, a realistic short sale offer would seem the fairest alternative to both. The spending of the bank "bailout" makes me want to suggest that the equitable thing to do would be for the bank to pay the seller for their "pain and suffering", but that ain't happening.

We have NY friends that foreclosed a year ago, and it's not on their credit report yet.

How far down SHOULD a short sale credit score drop, keeping in mind that there are a contingent of people who are managing to maintain their credit despite the economic disaster?

For the moment?

While there will be many transactions absent this element, the numbers are increasing-understanding the process itself is fine up until the point at which I wonder, "how far does a short sale drop a sellers credit score, were the short the only negative factor?"

Which leads to "how much SHOULD it?"

Posted by Laurie Mindnich North fork Long Island Real Estate on 01/10/2009 05:48 PM

Comments (22)

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22 Comments on What SHOULD the Credit Score Ramification Be for Short Sale Sellers?

JAN

Laurie, I could not advise on the time frame for credit being affected. However, I would be interested in reading that article. Could you provide a link to that please?

Hi Laurie

I realize the impact of short sales on the families and the economy, the question would be would a 6 to 9 month credit ding encourage more people to walk away from their homes?

Good luck and success

Lou Ludwig

Thanks, Tom- I'm unclear on it myself, but sellers want to know.

Lou, they're not walking away; they're short selling, which would require documentation to the bank that they are in dire straights in order to get bank approval- just have been able to maintain their credit up until the short sale closed.

I'd think that those that can pay, and won't, will seek out other alternatives- but your point is well taken.

Laurie,

That is a rather interesting question and I am not sure what the correct answer should be. The reality is these short sales are going to even more common this year and I can understand sellers wanting to know how their credit will be affected.

I don't think the length of time that a short sale remains on a credit report should be that much different than a foreclosure. I'm not going to over-think it and outline every detail, but we all make mistakes, and those mistakes carry ramifications. It sucks, but even when we have the best intentions, sometimes things don't work out the way we plan, and we have consequences for our actions. No matter what the circumstances may be, I don't believe we should be exempt from the consequences of our actions.

JAN

Jennifer, it's interesting that locating an answer (a definitive "it affects your credit for two years- ten years) is so difficult to locate in the above scenario. For most, with payments missed on other things leading up to a short sale, it's more clear...

Lisa, I'm completely uncertain, but I'm also not in a Florida market where you (unlike the majority of us in NY) have seen it ALL- hence, your input has special value- thank you!!

JAN

I thought it was about 2 years for a short sale, and I guess how well you maintain your credit.

JAN

John, that's my understanding as well- but I guess it'll all unfold as we work through this mess!

JAN

2-3 years with the biggest hit to the score in the early time, and decreasing as time goes. When the market & economy recovers, we'll see lenders putting loan programs out there for people who shorted but otherwise had great credit. It should be a manual underwrite, just like in the old days!

Patrick, sounds like we need to make absolutely certain that people get help BEFORE missing payments- now, if we can get the bank on the same page, perhaps there's a nice light at the end of this tunnel! Thanks for the comment-

JAN

I did not know it was such a short amount of time. I thugh it was about 2 years. thanks for the information.

FEB

Stella, I have found NOTHING that supports a nine month "clear record"- I think that you have it exactly right with a two year minimum. I was really surprised to have read that.

When I was in my Short Sale training class I was told 150 credit drop for short sales and a 1-2 year buy another home time frame.

For foreclosure's it was 250 and takes 507 years.

I just tell my sellers this is approximate but each credit reporting agency does their FICO's a little different.

Missy, thank you so much- tangible #'s are easier to comprehend, yet it was interesting that little has been published! That sounds right- nine months sounded a bit out of whack.

Laurie - Fannie Mae guidelines will allow short sale sellers to obtain a new mortgage in 2 years. Foreclosure or deed-in-lieu is 5-7 years. However, d-i-l with extenuating circumstances could be two. Credit drop is influenced by missing payments, late payments, too, so the "short sale" (settled for less...) will probably not be the only ding.

Hi, Wendy- I was aware of the FM guidelines, which is why the nine months was a shocker. THANK YOU for the clarification for me, and others- this is need to know stuff, with little info available (at least, in NY)- I appreciate it!

FEB

I am definitely not a short sale expert, but I thought the timeframe was 2-3 years? I haven't Googled it, but 9 months seems awfully short and I have not heard that.

Chris, the article suprised me, because it was instigated by a local real estate lawyer, and broker- hence, the question. Thanks for the input-

My intel from the industry tells me that, as far as the reporting agencies are concerned, there is NO DIFFERENCE whether it was a FC or SS. These sources are pretty accurate.

FEB

Jeff, that was my understanding initially, but there's much in the way of contrary info out there. I'm inclined to think that a deed in lieu of or short would offer the two year (as opposed to seven-ten of a foreclosure) but your comment is forcing a rethink- thank you for the input!!

MAY

Going to switch hats to my former loan officer's position...

I have seen people buy a house 2 years after a bankruptcy discharge.

Short sales shouldn't have much of a negative impact on credit- the debt is settled, after all. In a short sale, the damage has more to do with the LATE PAYMENTS so often involved in the process. Those remain on the credit report as long as the tradeline is on their profile, typically 7 years. But the impact is severely curtailed after 12 months and almost negligible after 24.

Phil, I keep hearing that the ramifications from FICO are identical, whether it be a foreclosure or short sale, but am hopeful that this will be mitigated somehow for those sellers that take the high road, at least attempting to get our from under the loss. Thanks for "switching hats"- the insight is very helpful!

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