How A Short Sale Effects Credit
Mar 16, 2010

I’ve seen and heard this question asked at many web sites, kitchen tables, conferences, classes, etc. The answers vary, but they all have one major piece in common: none of the answers are consistent, and few of them are backed by any real source. So it’s time to tackle that question as best as we can, so when you’re faced with that question by your next homeowner, you can answer with confidence.

The most detailed study to date was published by Vantagescore Solutions in January of 2010. Vantagescore took a large sampling of diverse credit profiles, and essentially ran simulations on how those profiles were affected based on various derogatory events including foreclosure, short sales, loan modifications, and bankruptcy.

The profiles were divided into four populations: 1. Clean credit, no prior delinquencies (Starting score: 862). 2. Some delinquencies, but current on mortgage (Starting score: 830). 3. Mortgage delinquency, but current elsewhere (Starting score: 722). 4. Various delinquencies on mortgage and non-mortgage credit (Starting score: 625).

The entire study is quite informative and can be read in its entirety here.

Among the derogatory events, short sales are in the middle of the scale. Forbearance and loan modifications are less severe, whereas a foreclosure and bankruptcy are considerably more severe.

The specific impact of a short sale on the credit score varies based on which population was studied. Those in population 1 saw their credit score drop by 120-130 points. The drop decreased progressively from there. Population 4 experienced a drop of only 15-25 points.

Credit rehabilitation can begin in as little as nine months if one is able to maintain payments without delinquencies. Unfortunately, the study does not give specifics on how a credit score can increase after its initial drop from a short sale, but it does state the following:

“Analysis shows that consumers can bring their score to a reasonable credit tier (such that they are potentially eligible for prime credit quality interest rates) if they are able to pay their debts on time after the loan modifications.”

Another myth that we’ve heard is that a homeowner’s credit is unaffected or affected less through the upcoming HAFA program. This claim is clearly wrong and somewhat irresponsible to spread. The HAFA guidelines clearly state that servicers “should continue to report a full file status to the major credit repositories”. Full filing is explained as describing the full status of a mortgage it is servicing as of the last business day of each month.

In conclusion, a short sale does negatively impact a borrower’s credit score, regardless of whether the short sale occurs through HAFA or not. Furthermore, the negative impact is greater for those with good credit as opposed to those who have already experienced delinquencies.

During the short sale process, the greatest impact on one’s credit occurs as a result of delinquent payments rather than a modification of the mortgage terms or forgiveness of the principle balance. As a real estate professional, it’s critical that you help close your customer’s short sale as quickly as possible. Foreclosure Guard automates the short sale process for you, helping you communicate clearly and efficiently with the servicers, resulting in faster short sale closings for your customers.

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