There are many questions surrounding the term: short sale. Some of which include, “How will a short sale affect my credit?” If I don’t stop making payments, can I save my credit?” How long does a short sale stay on my credit report?” Many seller’s are asking these questions…and many realtors too.
In the last year I have been involved in several short sales representing both buyers and sellers. So let me answer some of the most common questions.
First, let’s define the term short sale. Short sales happen when a lender agrees to accept less than the amount owed against the home because there is not enough equity to sell and pay all costs of sale. Not all lenders will negotiate a short sale, and that is why a real estate agent or a lawyer can be a tremendous help by working directly with the bank’s loss mitigation department. (Trust me it can be an arduous process, one that you don’t want to do alone.)
A short sale is like any charged-off debt. It will have impact on the borrower’s (seller’s) credit. The amount of impact depends on a couple of things, Is the mortgage current? Are there any late/missed payments? How is the short sale reported to the credit agencies?
The impact of a short sale can vary based on the status of payments either current or late and/or missed. The 30, 60,and 90 day late payments are what really hurt credit scores and will prohibit someone from getting another mortgage for a period of time. It could also effect the ability to secure other credit like phone service, credit cards, and even rent a home. A foreclosure or deed-in-lieu of foreclosure will affect credit between 200 and 300 points. If a seller in a short sale situation is more than 59 days late, the credit could be affected as severely as a foreclosure.
You can pursue a short sale without having any late or missed payments. A short sale itself will not damage credit as much as a late or missed payment but the short sale must be reported correctly. The banks can report a short sale as “Settled”, “Paid in full for less than the full amount”, or ”Paid as agreed for less that the full balance.” These terms may vary slightly from bank to bank. The least impact on your credit score will be when the bank reports no deficiency or $0 owed. Be sure to understand exactly how any remaining balance will be reported to the credit reporting agencies and if the bank will sell the remaining debt to a collection agency.
It is also important to recognize that if the debt is still outstanding, the bank will have the right to pursue the seller/borrower for the amount in the future. You should be very cautious with HELOC’s (Home Equity Lines of Credit). They are not the same as home equity loans because they are revolving credit. They are treated much like a credit card for reporting and collection purposes. It is very important that a 2nd mortgage whether a home equity loan or a home equity line of credit, be negotiated as NON-DEFICIENT and that term, or something similar, appear on the Short Sale Approval letter. Otherwise the potential for future collections and deficiency judgments placed against you exist.
So how long after a short sale will it negatively affect your ability to secure another mortgage or loan? Most banks will not issue another mortgage until 2-3 years after, whereas, a Foreclosure or Bankruptcy, will probably be 7-10 years. Note that Fannie Mae guidelines allow a seller to immediately apply for a new loan to buy another home if that seller kept the payments current, had no delinquencies exceeding 30 days, and did not agree to repay the debt relief. Again, it’s the late payments that affect your credit report, not the short sale.
In addition to the impact on credit, short sales have tax implications as well. I advise you to consult with a CPA or Enrolled Agent (EA) who is very familiar with the federal and Utah tax laws.
Understanding your choices and their consequences will help you make the best decision for you. Then you can move on, put the situation behind you and start rebuilding your credit through positive account management.