Does a Short Sale of a Home Affect Your Credit Negatively?
A short sale occurs when the lender on a mortgage loan agrees to accept less than the amount owed on the loan. This often occurs when the value of the home is less than the balance due on the mortgage. Lenders report a short sale to the credit bureaus and this information may negatively impact your credit.
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Considerations
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According to Experian, how a short sale affects your credit score depends upon how the lender reports it to the credit bureaus. If the lender reports the loan simply as paid and forgives the unpaid balance, this will not impact your score negatively. This is a rare occurrence, however, according to Experian. Often a short sale is reported as a settled account, meaning the lender settled the account by allowing you to pay less than you owed. Settled accounts are very negative and will adversely affect your credit score. According to Bankrate.com, your FICO score could drop by as much as 100 points.
Collections
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A short sale leaves an unpaid balance on the mortgage loan. The lender will report this unpaid dollar amount to the credit bureaus. Often, the lender will sell this remaining debt to a collection agency. A collection agency can place a collection account on your credit report under the Fair Credit Reporting Act and it can remain on the report for up to seven years. Collection accounts are negative items as well and this will further damage your credit score.
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Forgiven Debt
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As part of the negotiation for a short sale, some lenders may agree to a waiver of the balance remaining on the loan after the short sale. If the lender agrees to forgive this amount and not pursue you for it, make sure you get that agreement in writing. Through the end of 2012, under the Mortgage Forgiveness Debt Relief Act, homeowners are not required to pay taxes on up to $2 million of forgiven debt that results from the short sale of a home.
Judgments
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If the lender will not agree to waive your responsibility for the loan balance, keep in mind that the lender, or the collection agency, can sue you for that debt. A judgment against you will leave you vulnerable to pursuit of your assets, including money in your bank accounts or other property that you may own, depending upon the laws of your state. A judgment owner can seek to collect from you for many years. For example, the statute of limitations on judgments in Indiana is 20 years.
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References
- Experian; Impact of Mortgage "Short Sale" On Your Credit Report; Maxine Sweet; May 2008
- Bankrate.com; Short Sale Hits Credit Regardless Of Cause; Steve McLinden; March 2011
- Equifax: Who Can See My Equifax Credit Report
- Equifax: Length of Credit History
- IRS.gov: The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
- Card Report: Statute of Limitations on Judgments
- Bankrate.com; Short-Sale Risks; Justin Harelik; July 2008
