Short sales and your credit score

Mortgage short sales can affect your credit. But paying a crushing mortgage payment isn't a good solution either, if it means losing all your savings and eventually going into foreclosure. This article explains what a mortgage short sale does to your credit, and how to save your credit.

I am blessed to be in a business where I can help people a great deal, and still make money. I work with people who are in crisis in their lives and I find that they almost always over-estimate the difficulties they are in. Things are never as bad as they think they are. And I get to deliver that message, which makes me feel good.

Today I got one of many emails with a similar question so I thought I'd write about it. "Joan" writes: How will a short sale affect my ability to purchase another home? I have a large family and renting may not be a long term option for me, but currently we are barely making it to cover the 1st and 2nd mortgages. We want to move to another state where it is less expensive to own a house, and buy when we move, but I have concerns of our ability to qualify for a mortgage after a short sale.

So let me answer this as if I am speaking to Joan.

Joan, let's briefly discussing short sales, then credit scores and how they are determined, and finally, discussing how you will want to purchase your next house.

It is quite possible to do a short sale and still have decent credit afterwards. When you do a short sale, you can sometimes negotiate with the bank about two major issues: how they report your credit, and how whether they can go after you later for their financial losses.

Short sales and mortgage credit

The reason you can sometimes negotiate this is that you are not letting your house go through the foreclosure process and leaving it to the bank to deal with. When you do a short sale you are helping the bank. You are getting rid of a problem for them.

Most people don't realize that when they tell the bank that they are not going to be able to pay their mortgage anymore, the bank has a problem. And by selling the house, you are saving the bank tens of thousands of dollars they would otherwise spend going through the foreclosure process, getting the house back and fixing it up, marketing it and selling it.

Since you are doing this for the bank, you can make some requests in return. Especially if you have someone sharp helping you with the short sale.

As far as credit is concerned, most decisions to give you credit are based upon your credit score, usually your FICO score. FICO scores are determined by a combination of factors.
Mortgage FICO Scores

About one third of your credit score is made based upon your payment history, that is, whether you have been 30, 60 or 90 days or more late on any bill that is reported. How recent was the delinquency? How frequent? How severe? Fotolia_3956379_S.jpg

About one third of your score is based upon how much in total you owe, and this number in respect to how high your available credit totals. If you come close to your credit limits, this will lower your score. If you owe too much, this will lower your score.

How long you've had the accounts, how recently you've applied for credit accounts, and your "mix" of credit accounts for the remaining part of your credit score. Ideally you've had accounts open for a long time, haven't applied for much credit recently, and have a "healthy mix" of debt such as a mortgage, credit cards, and an auto loan.

If you do a short sale, you may also have been delinquent in paying your mortgage. If you pay your mortgage less than 30 days after the due date, that will not show up as late even though you will pay a late charge. But if you pay your mortgage 30 days or more late, that will definitely lower your credit score.

Mortgage lenders look at how you performed on your previous mortgage as a very important factor. It is a good idea not to be late on your mortgage for this reason.

One of the myths about short sales is that you have to be late on your mortgage. It is quite possible to do a short sale without ever being late on a single payment. Some lenders will be difficult to negotiate with unless you are late but if you are sharp in negotiating you can often overcome this issue and never be late and do the short sale.

The short sale can be reported as a foreclosure but more often it is reported as "paid - settled". This is a definite ding on your credit, but not a severe one compared to multiple delinquencies, charge-offs, foreclosure or bankruptcy. It is a very good idea to do a short sale as compared to running out of savings and ruining your life just to maintain 50 points on a credit score, at least that is how I see it.

It is also possible for the bank simply to remove derogatory reporting. They may say they can't remove something but in fact they can.
How to get a higher credit score after a short sale

Or, they can substitute "unrated", which is neither good nor bad. Unrated as an alternative to "paid - settled" is a great outcome but even if you can't get the bank to agree to this, it is still important to try.

Then there is another move. You can write a letter to the bank demanding this as part of the conditions for the short sale, and then continue with the short sale and complete it. That way you can then challenge the derogatory credit report afterwards and you have a shot at getting it removed based upon your letter. The bank may not have the appetite or staff to handle the challenge, and depending upon your state laws, they may have to remove the derogatory report anywhere from 10 to 30 days later.

So there is a lot of maneuvering room with respect to short sales and credit scores. For more, including what I would do if I were to buy a house today, in your situation, see www.MortgageReliefFormula.com

Comments

Submitted by JTucker on
Being persistent and talking to the people that have the power to say yes to your demands is key during these negotiations.

Submitted by Anonymous (not verified) on
Hi! My sister has a home in desperate need of repair. She lives and teaches in Korea. She is renting the home to a family member for way less than the mortgage and we help pay the difference. She really needs to walk away from this home because there is no way she can keep up this payment and frankly we can't either. She is worried that her credit will be ruined and that she will not be able to do a short sake because of the second loan she has against the mortgage. What are her best options? Who should she talk to first or is there a way for her to do anything without foreclosing...she really doesn't want to go this route. Thank you for your time and help in answering this matter. Mellisa