What does a short sale do to my credit?
Doing a short sale is most often less damaging to your credit report than a foreclosure, however contrary to rumors, that doesn't mean you're safe from damage. Although short sale credit "dings" cannot be avoided, they can be controlled much more easily than a foreclosure. What a short sale does to your credit depends on several factors, such as the amount you owe and how far behind you were when the short sale closed. Below is a quick look at how short sale credit effects happen and what you can expect after closing day.
Effects of Delinquency (late or behind mortgage payments)
Most borrowers have missed at least two months' worth of mortgage payments before initiating the short sale. This is a requirement for most banks, including the HAFA short sale program. This accounts for a significant part of the short sale credit impact. By the time a short sale application is submitted, there may already have been some short sale credit damage. One thing you can do is try to negotiate a short sale while you're still current-with sufficient proof of hardship, your bank may approve your request.
The difference between your home's selling price and your mortgage balance, known as the deficiency, is probably the biggest factor in short sale credit effects. Lenders will try to earn as much as possible from the sale to make up for their losses or to minimize them. The bank will usually do their own price appraisal or BPO (Brokers Price Opinion) and try to sell it for as much as possible. The less the lender has to forgive from your balance, the lower the short sale credit impact will be.
There aren't many rules on how a short sale should be reported, so depending on the lender the wording can vary from bank to bank. What appears on your credit report can either be a "pre-foreclosure in redemption," "paid as agreed," or even a straight foreclosure. This depends both on your mortgage situation and your lender's policies. If you have a good agent, he or she may be able to discuss reporting with your lender and have it worded so that the damage won't be as high.