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How Will A Short Sale Affect My Credit Score?

By Wendy Rulnick

Real Estate Broker/Owner with Rulnick Realty, Inc.

September 16, 2009 12:22 PM

Curious what your credit score will drop when you do a short sale? You’ll often read on the internet 80-100 points, sometimes less. Guess what? Sometimes it is more. I just received this email from one of my Santa Rosa Beach Florida short sale sellers. I sold his home a few months ago. I had asked him to check his credit score before and after the short sale. Here is his email:

“Checked on my credit score with Transunion and went from 780 (Excellent top 2 percent) to 633 (Rated poor to good). I was anticipating somewhere around 680 and disappointed that big of a drop.”

My seller only had one mortgage loan on his home. So, six missed payments and a short sale caused a 147 point drop. I don’t know the other variables he had that may have affected his credit, like high charge card debt, etc. But his drop is more than what is often quoted for a short sale.

A short sale or foreclosure are both similar derogatory events on your FICO score. However, a short sale will have a lesser impact on your future ability to borrow than a foreclosure or deed-in-lieu of foreclosure.

Fannie Mae, the nation's largest backer of mortgages, has guidelines that favor those who do short sales versus foreclosures or deed-in-lieu of foreclosure. In fact, you may be able to purchase a new home immediately if you have no missed payments and were not required to sign a promissory note or deficiency judgment was not entered. Otherwise, the waiting time is normally only 2 years after a short sale to buy a new home.

If you do a deed-in-lieu of foreclosure (turning in the keys) you will have to wait 4 years to apply for a mortgage with restrictions up to 7 years If you do a "walk-away" foreclosure, you will have to wait 5 years with even more stringent borrowing terms and a credit score of at least 680.

Additionally, your chances of a deficiency judgment may be less with a short sale, since fico score you are working with your lender to resolve the problem. In other words, with a short sale, your lender is not “taking” your property back and you are not leaving it in their lap.

So, don’t just focus on your credit score when contemplating your alternatives. Compared to foreclosure, a short sale may be your best choice when it comes to your future financial security.

It's Wendy!

Wendy Rulnick, Broker, CRP, CRS, GRI, ABR Rulnick Realty, Inc.

Santa Rosa Beach Short Sales & Pre Foreclosure Help.

Read Santa;Rosa Beach Real Estate Blog

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Call Wendy Rulnick, to help you sell your short sale home in Destin, Santa Rosa Beach, Fort Walton Beach, Niceville, Bluewater Bay, Navarre, Seagrove Beach, Watercolor, Sandestin, Seaside, Crestview, Rosemary Beach, Mary Esther, Shalimar, Eglin AFB, Hurlburt Field, Florida. Wendy Rulnick has been featured in "Kiplinger Personal Finance Magazine" and "Florida Realtor Magazine".

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This site, Wendy Rulnick or Rulnick Realty, Inc. is not providing legal or tax advice. The information provided is for educational and informational purposes only. It is recommended that sellers considering a short sale should consult an independent legal and tax advisor for more information.

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Ralph Gorgoglione

Metro Life Homes - Palm Springs, CA

California and Hawaii Real Estate (310) 497-9407

Gosh, it's so hard to say when you get entirely different opinions on this.

Sep 16, 2009 12:27 PM

Jimmy Williams

Keller Williams Elite Partners IV - Mount Dora, FL

Lake and Western Orange County Real Estate Expert!

Wendy,

With a minimal credit score hit you have to wonder what a seller is thinking when they won't even attempt a short sale.

Sep 16, 2009 01:20 PM

William J. Archambault, Jr.

The Real Estate Investment Institute - Houston, TX

Wendy,

It always amasses me when people think there should be no penalty for late payments. But, it appalls me when real estate "pro's," and I use the term loosely, expound the same thing!

If there is no NOD filed credit scores should bounce back in 6 months, but you'll be explaining it for 7 years. The only thing that's unfair is the "universal default" excuse the credit card lenders are going to use to raise there interest over 30%!

Bill

Sep 16, 2009 02:35 PM

Sally K. & David L. Hanson

EXP Realty 414-525-0563 - Brookfield, WI

WI Real Estate Agents - Luxury - Divorce

Have not had any deeds in lieu...and think at least here that is a dinosaur in the real estate market. Staying on top of credit is crucial to getting right side up and on with life and giving short sale sellers another chance...I think I feel a re-blog coming on...thanks..again...and again.

Sep 16, 2009 11:45 PM

Wendy Rulnick

Rulnick Realty, Inc. - Destin, FL

"It's Wendy... It's Sold!"

Ralph - No one can predict what someones credit score will drop after a short sale.

Jimmy - I agree.

Bill - Yes, right after the short sale, start making your payments on time. Most people would. Credit scores WILL bounce back. Just watching a protest about credit card rates on t.v. right now!

Sally & David - www.myfico.com is a great resource at a low fee to keep on top of credit score. Even Suzie Orman promotes it:)

Sep 17, 2009 12:33 AM

Sheldon Neal

Bergen County, NJ - RE/MAX Real Estate Limited - Maywood, NJ

That British Agent Bergen County NJ

Very well put Wendy !

I have been promoting this type of approach to many distressed sellers who are looking over their options. There are also some practises to help them recover their credit faster, so yes, the SS may be the best of options.

Cheers Wendy !

Sheldon

Sep 17, 2009 01:55 PM

Lynn Pineda

eXp Realty - Boca Raton, FL

Real Estate Promises delivered in SE Florida

Good clarification Wendy and further proof that a Short Sale really can be a good thing and certainly the lesser of all evils.

Sep 19, 2009 02:38 PM

Wendy Rulnick

Rulnick Realty, Inc. - Destin, FL

"It's Wendy... It's Sold!"

Sheldon - Thank you - you are absolutely right.

Lynn - Thank you much.

Sep 20, 2009 03:22 AM

Jim Hale

ACTIONAGENTS.NET - Eugene, OR

Eugene Oregon's Best Home Search Website

There are a great range of opinions on the impact of a short sale on FICO scores and the ability of a seller to be a buyer in the way they were before.

A lot of short sellers are being oversold on the benefits to them of doing a short sale.

None of us can know what rules are going to be in force in the 2-5 year time frame when a seller tries to buy again. I expect a lot of very unhappy people when they find out the rosy scenario they heard in the listing presentation turns out not to be the case.

Your client with the drop in FICO that was greater than he was expecting may have been hurt as much by the late payments as by the short sale itself.

And there are great differences in how lenders are actually reporting short sales. Some short sale specialists say a short sale will not be reported the same as a foreclosure. But some clearly are.

It appears the only way a short sale can have minimum impact is if you undertake it BEFORE you have all those mortgage lates. Not every lender will allow you to do that. Some clearly will force you to be late before talking to you. They all try to avoid talking to you early.

The negotiated approval needs to include an attempt to pin down how the sale will be reported.

We all need to remember that short sales are taking place, ultimately, because lenders think a short sale is in the lender's interest -- not because they want to give the seller a break.

Sep 20, 2009 08:23 AM

Wendy Rulnick

Rulnick Realty, Inc. - Destin, FL

"It's Wendy... It's Sold!"

Hi Jim - You are absolutely right. Many sites tout 50-60 point credit drops on short sales. There is no "standard" credit drop. It depends on the borrowers existing credit situation, balances carried, lates, other payment histories, etc., as I have been told by credit repair companies. So one can never quote an exact drop. That is why I felt it important to write this blog post. My studies show that a short sale reported as paid as agreed, less than full, etc., is the same score factor as foreclosure. Again, other variables determine exact score change. No one will know how the short sale will look on someone's credit history in five years, or if Fannie Mae will again change their guidelines. That is why we can only provide information and facts and let the homeowner decide, with the advice of an attorney. Thank you for commenting.

Sep 21, 2009 01:29 AM

Mark Horan

Resident Team Realty, LLC & Toni's Property Management LLC - Saint Cloud, FL

"The Resident Chef" - Resident Team Realty LLC &

Wendy,

My wife did a short sale and she missed no payments. She took a 100 point hit. Within 5 months she was back 50 point to a 740 score. Two weeks ago Bank of America closed a credit card with $11,000 limit that had no balance. They also took her card with $25,000 limit with $3000 balance and changed the limit to $3,200. They then changed the interest to 26.9% from 8.9%. She called to inquire and they said it was because of the short sale. Creditors are now treating them as a foreclosure. I don't know if it's just B of A or all banks are going this route. Since I am working three short sales with B of A, I had to go back to the homeowner and update them on what might happen to their credit after explaining as you did initially in your post. Things are changing.

Oct 10, 2009 04:42 AM

Wendy Rulnick

Rulnick Realty, Inc. - Destin, FL

"It's Wendy... It's Sold!"

Mark, Thank you for the excellent info. The good news seems to be the "bounce back" of her score. That was quick. These credit card companies are out of control slicing and dicing everyone (no pun intended, Chef).

Oct 10, 2009 09:49 AM