A short sale will affect your credit in two ways. First, a short sale will be reported to the credit bureaus as an account settled for less than the amount owed and will remain on your credit report for seven years. Second, any loan payments that are more than 30 days late will have a negative impact on your credit. In most instances, the late payments will have a greater effect on your credit score that the short sale itself. In order to understand the overall effect a short sale will have on your credit, you must first understand what a credit score is and how it is determined. A credit score is a number generated by a mathematical formula that is meant to predict credit worthiness. The most common of the credit score standards is the FICO score by Fair Isaac. The FICO score ranges from 350-850. Fair Isaac uses thousands of credit reports to calibrate the FICO scoring model and is very secretive of the exact formula. The graph below is what Fair Isaac makes public about the procedure used to determine a credit score. As you can see, your overall credit picture is made up of five different factors with each being a different “piece of the pie.” How a short sale will affect your overall credit score depends on your current credit “pie” and how many payments, if any, are missed during the short sale process. In order to request approval of a short sale, you do not have to be behind on payments. Some lenders only require evidence of “imminent default” such as a job loss or decrease in household income and/or evidence of savings sufficient for less than two monthly payments. However, most lenders are more inclined to accept a short payoff if you are already late on payments. Lenders often consider a short sale the “lesser of two evils” when compared to a foreclosure. If you are more than 30 days late on one or more payments, then the likelihood that the lender will eventually have to foreclose on the property is greatly increased. In such cases, the lender may view acceptance of the short sale as a way to avoid the costly and time-consuming process of foreclosure. If you have good credit before starting the short sale process and are able to continue making payments on the property or keep missed payments to a minimum, the short sale will be a relatively small piece of your overall credit “pie.” If you continue to make all other loan and credit card payments on time after the short sale, that piece of the “pie” will get smaller and smaller with time. One of the biggest advantages of pursuing a short sale instead of allowing your home to foreclose lies in your ability to purchase another home in the future. In most cases, if your house is foreclosed upon, you must wait five to seven years before attempting to buy another property. In addition, after a foreclosure, Fannie Mae will require a minimum 10% down payment and a minimum FICO score of 680 and will allow the purchase of a primary residence only. By contrast, Fannie Mae guidelines stipulate a waiting period of just two years before reestablishing credit after a short sale with no additional down payment or FICO score requirements. |