Credit Score After a Short Sale

A hot topic surrounding short sales is the potential credit impact that will happen after short selling. 

There is no doubt that a short sale will impact your credit.  In fact, it's reported the same way a Foreclosure is reported on your credit report.  Most of our short selling customers have either already stopped paying the mortgage or are just about to run out of cash and will have to stop paying at some point in the near future. 

Why do a short sale instead of just letting it foreclose? 

1. Deficiency balance:  In Florida the bank has the right to collect on the deficiency (amount owed vs amount the home sold for in a short sale or a foreclosure sale) for UP TO 5 YEARS after the sale happens!  Ouch, that's a lot of time!  So:
   • In a short sale you have a much much much higher chance of your bank waiving/forgiving that balance with NO FUTURE implications.  They put it in writing so you know for sure what you've got before you close on the short sale.  (It's part of their terms and conditions of the short sale).
   • Foreclosures deficiency balance is MUCH HIGHER!  Average foreclosures sell for some 30%+ LESS than a short sale.  Larger loss = larger potential deficiency balance.  Are the banks going after people?  You bet they are.
2. Time Impact:  Once we get your house listed, we can get it on the market, marketed, and sold within 30-90 days.  Then we usually get your banks approval in the 60 -120 day timeline, and closing is some 30-45 days after that.  
   • Short sale time impact is less.  Meaning less time you've had negative reporting on your credit report.
   • Foreclosures time impact is much higher.  They average over 600 days in Florida.  That's almost 2 years of negative reporting on your credit report!  
3. Credit Scores a Long Term Look Back:  Credit scoring agencies look at your long term history.  The shorter this small bump in the road is, the better.  
4. Reset Faster:  After a successful short sale, the clock starts ticking towards repurchasing another home.  You can usually repurchase another home within 3 years after a foreclosure or a short sale.  The faster you can get that clock to start, the better.   So to recap some of the time above:
   • Short Sale:  clock starts ticking towards repurchasing in some 4-7 months from now.
   • Foreclosure:  Could be as long as some 2+ years from now before the home finally gets taken by the bank and then the clock starts ticking.

What does a short sale do to your credit score?

Typically 80-160 point drop.  See this Fox News story on Credit after a Short Sale.

The good news:  If you had decent credit to begin with because of your long term look at your credit history, then it will pop back up super fast. 

Several of our customers have seen their credit bounce back within 4-6 months after the closing! 

Does your credit score really matter right now?

I dislike credit scoring due to the "hold" it has on so many people.  I get at least 1 call per week of someone bragging about their 800+ credit score and they've never had a credit problem, and blah blah blah.  BUT - they need to short sale because they lost their job and do not want a credit impact from the short sale.  IMPOSSIBLE. 

I get other calls where they "did have credit scores in the 800s" but lost a job, went on rice and beans diet, used their savings to continue making payments on the house, then used the small inheritance from Grandma to continue making payments on the house, and then liquidated the 401K's to continue making payments on the house.  Finally, they had no other options but to stop making payments on the house, and guess what - they didn't get arrested and thrown in the "do not pay your bills jail".

All this to save a house that they owe $300k on and it's only worth $185k?  

All this and now they are FLAT BROKE!

That's why I dislike credit scoring.  Too many people are held hostage by their number.  By the thought of how bad it will be to not have credit.   

How to short sale your house