After a short sale transaction is complete, the lender is going to report to the three credit bureaus (Equifax, TransUnion and Experion) that a short sale was conducted on the loan, as opposed to a full payoff. Although lenders are subject to change their policies on a moment’s notice, we have seen Countrywide report, “settled as agreed”, Litton Loan Servicing report “account settled”, HFC Beneficial report “settlement in full” and HSBC report, “Account legally paid in full for less than the full balance”. This terminology is very similar to what credit card companies report when a borrower settles an old collection for a percentage of the total amount owed.
In most cases, the short sale approval letter will specify the exact wording the lender is going to report to the bureaus. In isolated cases, you may find where the short sale approval letter does not specify how the short sale will be reported and in such cases, you should contact the department handling the short sale to determine how it is going to be handled. Also, we have seen where some lenders fail to report a short sale to the credit bureaus, for who knows what reason. Maybe they forget? And if the account is more than 120 days past due, many times it will automatically show up as a “foreclosure” on the credit report. Therefore, it is imperative that you follow up with all three credit reporting bureaus a month or two after the short sale is complete to verify with all three credit bureaus that a “foreclosure” is not showing up. In such cases, you may have to provide evidence to Equifax, TransUnion and Experion to prove that indeed the property was sold prior to a foreclosure. I hope this helps you understand how a short sale affects a credit report.
How Does a Short Sale Affect A Credit Score?
Your credit score is actually a formula developed and maintained by a private company called Fair Isaac Company, Inc. The score is determined on a weighted scale with Payment History and Amounts Owed weighted far heavier than Length of Credit History, New Credit and Types of Credit Used. .
Since Fair Isaac invented and continues to maintain the credit score formula, naturally, we should ask them how a short sale affects a credit score. The question posed to MyFICO.com was, “How does a foreclosure or short sale affect my score?” Their response was:
“Credit bureau reports are limited in how they represent foreclosures today, so its generally not possible to tell from the credit report if a reported foreclosure is a short sale, deed in lieu of foreclosure, settled account, regular foreclosure or some other variation. The FICO score treats all of these descriptions that appear on credit reports as serious delinquencies, so they have an impact on the score similar to the impact from a charge off, tax lien or account included in bankruptcy.”
So the initial score decrease will be the same — experts say a ballpark of 100-200 points on a scale of 300 to 850. And the higher the credit score the greater the fall.
But the report itself looks far better, being that most underwriters agree that a short sale looks better on a report than a foreclosure. When you’re doing a short sale it shows that you’ve actually done something about the foreclosure, versus letting it go to foreclosure. In fact, FHA has developed a loan program just for borrowers who have had a short sale.
Also, there is one way to minimize your credit score reduction when dealing with a short sale. Try to avoid allowing the payments to go behind. That maybe easier said than done and I know that sounds like an oxy-moron, doing a short sale while keeping the payments current, but it can be done. The most destructive item to your credit score is the late payments. When it shows 30 days late, then 60, then 90 then 120+ days late, that’s when the credit score takes it’s biggest hit. So if you can squeek by and keep the payments from falling 30 days late, you stand to really minimize the damage to your score from a short sale.
This answers the question of How does a short sale affect my credit score?