One of the most common questions I get asked when discussing short sales with a prospective seller is, "How much will a short sale affect my credit?" This is a loaded question and there is no definitive answer. A quick Google search for this query yielded responses that ranged from "not at all" to "over 250 points."
So which is it? What effect will the short sale have on your credit? While there is no all encompassing answer to this question, the following items will play a roll in the credit consequences of your short sale.
A short sale is not a specific credit event. The major credit reporting agencies do not have a specific credit event for a short sale. Therefore, when you successfully complete a short sale on your home it does not show up on your credit report as "short sale." The majority of the short sales I have worked on are reported as "settled." This means the lender accepted less than originally agreed upon to settle your loan balance.
In my experience, this, in and of itself, does not have a dramatic affect on your credit score. In fact, it is no different then settling any other balance you owe (whether it be on a credit card, personal loan, car loan etc.) I have seen credit drops of fewer than 50 points for a "settled balance." The settled balance can also fall off your credit report in as little as 12-18 months.
I have on a few occasions seen lenders report a short sale as paid satisfactory or paid in full, which has no effect on your credit. This is more common if the Seller agrees to sign a promissory note or agrees to pay a percentage of the remaining balance at closing.
Late mortgage payments during a short sale have a dramatic affect on your credit. Distressed sellers attempting a short sale are often behind on their mortgage payments. Not paying your mortgage for 30, 60, 90 120+ days will have a cumulative negative effect on your credit. Somebody who has not paid their mortgage in 4+ months is likely to have more credit damage from their late payments than from the short sale itself.
Has the lender filed a "Notice of Default" or made you aware of their intent to begin foreclosure proceedings? If you are behind on your payments the lender may file a notice of default. This is a public filing that alerts you and your creditors that the lender is starting the foreclosure process. Some lenders will file this notice almost immediately after you miss a payment and some lenders will wait as much as a year before proceeding with the foreclosure process. Just because the notice is filed and a foreclosure date is set, does not mean a successful short sale can not be completed. It just means it must be done quickly! Even if a short sale is ultimately completed, the filing of the notice of default will negatively affect your credit.
In conclusion, all short sales are not created equal. They can affect your credit as little as 0 points or as much as 250+ points. If you have no late payments and the lender agrees to report the sale as "paid in full" (which rarely happens) you will not suffer any damage to your credit. However if you have not made your mortgage payments in several months, the lender files a public notice of default and the final short sale is reported as "settled" the credit consequences will be significantly worse. The Certified Distressed Property Expert (CDPE) Institute reports that on average a short sale affects a borrower's credit between 50-100 points.
If you are interested in learning more or want to explore the possibility of selling your home via Short Sale visit me online at www.Avoid4ClosureTN.com or e-mail me at aaron@armstrongrealestategroup.com.
To search all properties for sale in Middle Tennessee and find some amazing deals on Nashville Short Sales visit www.TNRealEstateSearch.com.
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