How Does a Short Sale Affect Your Credit Rating?
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A Way Out
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When you request a short sale, essentially, you are asking your lender to do you a favor. The answer you receive will be based on how you plan to treat your lender when the property is sold. In a short sale situation, you and the lender both know that your selling price is going to fall "short" of your outstanding loan balance. There are countless reasons that your house is upside down, probably with a falling housing market and the economy being at the forefront of that list. Some borrowers search for a way out of the financial mess. A short sale is an alternative to foreclosure, and if done correctly, your credit rating can remain financially sound.
Voluntary Short Sale
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Rhe decision to accept a short sale is strictly that of the lender, not the borrower. But if your lender is willing to accept a short sale, the effect the sale has on your credit is determined by how the sale is handled. If you voluntarily sell your home and you make up the difference between what the house sells for and the amount you owe the lender, there should not be any significant changes to your credit rating. In this kind of situation, you are the only party who took a loss because you are paying the difference. The debt should read "settled" on your credit report.
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Forced Into Foreclosure
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If the short sale is the result of you being forced into foreclosure, the credit implications will be drastically different. For example, if you owe $300,000 on the property, but the bank was only able to sell the house for $200,000, the bank is out $100,000. It cannot look to you to pick up the tab because if you were able to pay the difference, you would have been able to pay your mortgage. So more than likely, the lender will sue you for the difference and be awarded a default judgment. This will result in you having negative marks on your credit.
Exceptions to Every Rule
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In some cases, a lender will not sue a borrower for the money lost in the short sale. Instead, the lender may choose to write off the unpaid balance; but this road will also hurt you. Congress temporarily lifted the tax consequences for this shortly after the housing bust of 2008, but the easing was considered to be temporary -- in normal years the lender would submit a 1099 to you at the end of the calendar year listing the $100,000 as taxable income, which means that the IRS would expect you to pay income taxes on that money.
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