How Much Does a Short Sale Hurt Your Credit?
A FICO credit score begins at a low of 300 and extends to a high of 850. Consumers with higher credit scores are considered a better credit risk than borrowers with low scores. If you are considering a short sale, you should understand how that short sale will affect your credit.
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Identification
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A short sale occurs when the lender accepts less than the amount owed on a home loan. It's usually a last resort before foreclosure. Lenders agree to a short sale in lieu of a foreclosure if the borrower is in financial distress and the lender believes the borrower is unable to pay the full amount. A borrower has to get lender approval before he can place a home on the market as a short sale.
Effects
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Foreclosures generally drop a FICO credit score by as much as 160 points, according to Bankrate. However, according to MyFico, credit bureaus list short sales and other mortgage delinquencies in such a way that it's not always possible to determine whether the home was sold in a short sale or was a foreclosure. Therefore, a FICO credit score considers all such mortgage entries as serious delinquencies. As a result, a short sale will negatively impact your score in the same manner as a charge-off or other seriously delinquent account: Your score will drop, but how much the score falls is dependent on other factors in the report.
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Warning
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According to an April 2009 report in the Wall Street Journal, a short sale may not relieve you of the financial responsibility for the mortgage amount. The lender may come after you for the difference between the amount received in the home sale and the amount you owed on the loan. This is called a deficiency. The lender can require you to sign a promissory note for this amount, and you have to make payments on that amount. Or, the lender could sue you to obtain a judgment, and that judgment is included on your credit report and will further damage your credit.
Considerations
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You can try to negotiate with the lender as part of the short sale process, hoping to get the company to agree in writing that it will not come after you for the deficiency amount. If the lender agrees, the lender may write that deficiency amount off as a loss on its taxes, but as income to you. According to MSN Money, this means the lender will send you a 1099 form and you must to pay taxes on that amount.
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