How Does a Short Sale Affect A Credit Score?

The #1 question my students are asked by homeowners is, How does a short sale affect my credit score?  Let’s define what a credit score is first before we embark on how a short sale affects the score.   Your credit score is actually a formula developed and maintained by a private company called Fair Isaac Company, Inc.  The score is determined on a weighted scale with Payment History and Amounts Owed weighted far heavier than Length of Credit History, New Credit and Types of Credit Used.  See FICO Basics for a more detailed explanation. 

Since Fair Isaac invented and continues to maintain the credit score formula, naturally, we should ask them how a short sale affects a credit score.  The question of, “How does a foreclosure or short sale affect my score?”  was responded to with information on a recent study:

FICO looked at how a short sale would affect three different types of mortgage holders: One with a 780 score; another with a 720; a third with a 680 (FYI…Most lenders consider poor credit about 650 and below)

• 30 days late: The gold-plated 780 drops to 670-690, the middling 720 becomes 630-650, and 680 is now 600-620. Effects are most significant for the strongest borrower. “A continued progression is going to have less and less impact on a score,” Ms. Gaskin said.
• 90 days late: This is seriously delinquent, and brings the onetime best borrower down to 650-670, the midlevel one to 610-630, and the weakest to 600-620.
• Short sale, deed in lieu of foreclosure, or settlement, assuming the balance has been wiped out: The result is just a bit less serious. The 780 score deteriorates to 655-675; 720 to 605-625; 680 to 610-630.
• Foreclosure, or short sale with a deficiency balance owed: For either, 780 is 620-640; 720 is 570-590; and 680 is 575-595.

At a certain point it might seem as if there was not much difference between bad and worse, but remember that the lower the score, the longer it takes to climb back.

Not what you were hoping for?  Well, in another article I put together, “Why a Short Sale is Better Than a Foreclosure“, I describe the massive benefits of a short sale over letting the property go to foreclosure.  As it turns out, the credit score itself may not necessarily be helped by a short sale over any other seriously delinquent account, such as a foreclosure. 

But the report itself looks far better, being that most underwriters agree that a short sale looks better on a report than a foreclosure.  When you’re doing a short sale it shows that you’ve actually done something about the foreclosure, versus letting it go to foreclosure. In fact, FHA has developed a loan program just for borrowers who have had a short sale. 

Also, there is one way to minimize your credit score reduction when dealing with a short sale.  Try to avoid allowing the payments to go behind.  That maybe easier said than done and  I know that sounds like an oxy-moron, doing a short sale while keeping the payments current, but it can be done.  My students and I do those all the time.  The most destructive item to your credit score is the late payments.  When it shows 30 days late, then 60, then 90 then 120+ days late, that’s when the credit score takes it’s biggest hit.  So if you can squeek by and keep the payments from falling 30 days late, you stand to really minimize the damage to your score from a short sale. 

This answers the question of How does a short sale affect my credit score?

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