In a discussion today with a client we addressed the question of credit scores and short sales. This is a hot topic and there is information everywhere on what happens and when and for how long. No where have I found information that I would swear by, and for this reason I am posting this Blog.
The question is, "HOW DOES A SHORT SALE AFFECT CREDIT SCORES?" The obvious follow up question is, HOW DOES A FORECLOSURE AFFECT CREDIT SCORES?"
My client had a discussion with someone who says they have experience with the ISAAC scoring methods, and here is the email (in somewhat redacted form to protect names). Please discuss in this Blog what your REAL experiences are with this subject -- PLEASE - NO SUPPOSITION.
The email goes like this:
A short sale will be reported as "settled," but that's not good. Settled is considered seriously negative by scoring models. It would be better if they just showed it as paid $0 balance and left it at that. But you won't have any say so over how they report it.
I know you're getting conflicting info but the only source that you should be listening to is someone from Fair Isaac.
Those other parties that you mentioned don't know their way around credit scores. And the worst are mortgage brokers and realtors. I can't tell you how many messes of theirs I've cleaned up in my time. In fact, I place the majority of the blame for the meltdown on brokers and realtors. Being commission based is too tempting for many people to do the right thing. I'll tell you how it's treated so you can stop getting the run around...
Short sales are as bad as a foreclosure. Credit scoring models have what's called a "Performance Definition" or Perf Def in my world. A Perf Def is essentially what the model's primary design objective is. The FICO score's Perf Def is to predict likelihood of someone going 90 days past due or worse in the subsequent 24 months after scoring. A settlement (or short sale) is considered payment not in line with original contract terms so it's treated by default as negative.
Anything that's treated as negative (or "major derog") is for all intents and purposes the same. So, a settlement is the same as a repo, foreclosure, charge off, collection, etc etc. It may be better from a lender's policy perspective but not from a scoring perspective.
So there you have it. Active Rainers - if you have REAL real life experience and can comment on the statements made above, please do so and we can all learn together.
Copyright 2008 Richard P. Zaretsky, Esq. Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader. Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com. See our easy to find articles at Need Short Sale and Modification Information? - These Articles Probably Answer Your Question
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