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Effect of a Short Sale on Your Credit Score

Written by Nickel - 18 Comments

Effect of a Short Sale on Your Credit Score

Have you ever wondered what effect a short sale has on your credit score? Well, former FCN staff writer Matt Jabs now knows the answer.

Matt and his wife recently completed a short sale of their primary residence, selling their place for about $50k less than the purchase price, ultimately suffering a loss of ca. $25k in equity (including around $15k in improvements).

Going into the process, Matt’s credit score stood at 790. Afterwards? 705. Moreover, according to Matt, it was the missed mortgage payments that preceded the sale, and not the short sale itself, that reduced their credit score .

Note that most banks won’t work with you on a short sale unless you’re already behind on your mortgage payment.

Surprised? I am. I would have expected much more than an 85 point decrease. In fact, when I last wrote about the effect of housing woes on your credit score, the prevailing wisdom was that a short sale would reduce your credit score by 120-130 points. At 705, his credit score is still quite good given what they’ve been through.

Published on February 15th, 2012
Modified on July 21st, 2014 - 18 Comments
Filed under: Debt Reduction, Mortgages, Real Estate

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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18 Responses to “Effect of a Short Sale on Your Credit Score”

  1. 1
    Steve Says:

    Did he wait to make sure the sale had hit his report?

  2. 2
    jim Says:

    Yeah I’d wonder if the impact of the short sale has actually hit the FICO yet. I assume its not instantaneous and who knows how long the credit bureaus might take to catch up.

    It depends on if there is a deficiency judgement or if theres a settlement or dead-in-lieu. Basically that means whether or not you technically still owe the difference of if you got an agreement with the bank that they’d forget about the loss. If theres no deficiency then your score won’t be hurt as bad.

    I found FICO data cited on another site that claimed if you start at 780 then your score can end up at 655-675 if there is no deficiency or as low as 620-640 if theres a deficiency.

  3. 3
    Matt Jabs Says:

    Yep, it has hit.

  4. 4
    Beth Says:

    I don’t think the short sale has hit his FICO yet, maybe just the late/missed payments, but not the short sale. Here’s why. Suze Orman did a piece on a her show a few months back on this and I took good notes on it as myself and my husband were thinking about doing a short sale now, in order to not pay income tax on the difference of what we owe and what we sell for (if done prior to the end of this year, you don’t have to pay taxes on the difference). She broke it all down according to your credit score. Those with scores in the 700s were hit much harder on their FICO then someone with an average score of around 650ish. Those in the 700s would drop about 200 points, as opposed to those with 600s who would drop about 100 points. She said that is because those with good credit scores are much more responsible and by doing a short sale or foreclosure would hurt them more in the end run, with the thinking behind it that those with the good credit scores 700s and 800s would hold on to that score and NOT do a short sale/foreclosure. On this information alone, we decided to not even THINK about doing a short sale.

    If I can go home and look through the notebook I used to take notes on this episode, I can come back on here and write out the table of the credit score impact, but I will need to find the notebook from that episode.

  5. 5
    Matt Jabs Says:

    Let me squelch the hearsay. The short sale has already hit my credit score. Also, for those looking at doing a short sale, do NOT let your fear of a lowered credit score stop you from getting out from under the debt if you’re in hardship; it’s a no-brainer.

  6. 6
    jim Says:

    The score impact will vary based on the situation.

    I think we can trust what Matt says about his own score.

    Other people may get more of a negative hit on their scores due to different circumstances. FICO info said that people at 780 could go down to 655-675 and at the top of that range is 675 which would be a 105 negative hit. Matt saw a 85 point negative hit. Its certainly believable. Someone else in a different situation could see a -150 hit.

    I also agree with Matt that people shouldn’t be in total fear of short sales due to the FICO hit. Chaining yourself to an underwater house for the next decade simply out of fear over credit score impact may be a very bad choice.

  7. 7
    An Says:

    I had my house short sold in Nov 2011. My score was about 680 due to falling behind on my mortgage payments. After the short sale, my report from Experian doesn’t show any delinquencies, and just a KD (Key Derogatory). My score currently is 692.

    Not saying that this is the norm for everyone, but the biggest thing to remember is, getting out of a financial quagmire is SOOOO MUCH MORE important than trying maintain a “high” score. Your credit will come back. The nights you spend stressing will not. The choice for me was to try to stay afloat in a house that is more than 100K underwater, or take the hit to my credit now and rebuild it in two years.

    Now I am on my way with paying off my debts…I just paid off all my credit cards today!

  8. 8
    Kevin R. Says:

    RE: “Also, for those looking at doing a short sale, do NOT let your fear of a lowered credit score stop you from getting out from under the debt if you’re in hardship; it’s a no-brainer.”

    I’d have to agree. I guess if considering for purely monetary reasons (strategic default), a lower FICO, taxes due or whether you live in a “non-recourse” state should all be factors to consider. However, if a family in financial hardship, FICO should probably be the last concern, also getting out of debt burden via a short sale is probably the better option than foreclosure in the long run. Getting the family back on solid footing should be the main concern, access to credit is only a part of the overall financial well-being.

  9. 9
    Kevin R. Says:

    A comment for those who doubt the claim. We should remember that FICO is private company whose deliberations are not public. I think it is very possible some elements of the calculations are dynamic and there may have been a softening in terms of a ’short sale,’ to give a wider berth from a foreclosure and bankruptcy. Since the lender does have a say in the first and little-to-none in the latter, with the increase volume of all three over the last five years, it would not surprise me if FICO’s customers have given feedback to favor short-sales over the others.

  10. 10
    Kerri Says:

    I have a question for Matt: We are now attempting a short sale and are current with our mortgage. (My husband has cancer, and we need to sell to try to get on top of our credit card/hospital bills. But the housing market around us has totally collapsed, and we are looking at quite a loss on the asking price.)

    Anyway, we are trying to figure out whether we should strategically stop paying the mortgage at some point. I know this is personal, but would you mind saying when you stopped paying your mortgage?

    We, basically, are trying to preserve our credit score enough to be able to easily rent next; we have no interest in purchasing again anytime soon. (We have excellent credit now — high 700s/low 800s.)

  11. 11
    Patrick Says:

    Matt,
    Did you purchase another home or are you renting? I was curious if you had trouble purchasing another house or finding a rental based on the credit score hit?
    I’m considering a shortsale, but would like to purchase another house (which would save me several hundred $$ a month with lower loan and interest rate)or find a nice rental unit.
    Thanks for sharing your information and insights into this process.

  12. 12
    layla Says:

    I am going through a short sale as we speak, my home lost 52% of its value and its less than 5 years old. My credit score has actually increased since I stopped paying the mortgage, I moved and got a job in another state, after unsuccessfully trying to rent the property out, I could no longer afford to keep paying mortgage as well as rent with my new place. Once I find a buyer and the short sale is completed I will come back and post to let you know how this has impacted my credit, but I have not made a payment since going through this process which has been over 4 months, and the bank hasn’t even reported the late payments yet.

  13. 13
    Lisa Says:

    My credit was about 800 and then we missed 2 payments during short sale process. 2 missed payments + the short sale resulted in my credit score at 630. But it listed the 3 credit agencies and two of them listed 630 and the other 710. Its all messed up. I am trying to rent now, but every landlord says “its the norm now” when I tell them we did a short sale and took a hit to my credit.

  14. 14
    Laurie Says:

    Short sale for us was Aug 31 2012. Score was 677 in July. Score now is 685. It has gone up. During the months leading up to short sale the bank did not report late payments so for a few months the score was in 730 range. We took advantage of higher score and applied for rental a few months ahead and reserved a place. I belong to a credit union that gives us our score free every month. I expected a huge drop in score. Happy it did not happen. It was reported within 30 days of sale plus they then added one month late report. This is the only negative item on our credit. Plus we don’t have lots of inquiries and low debt otherwise. Job caused us to move otherwise we would not have sold.

  15. 15
    Mustapha C Says:

    I have been trying to do a strategic default; short sale one home while trying to buy another on. I was timing it so that I would buy another place a couple of months before closing on the short sale. However, the purchase was delayed for several reason. After I could not stall the short sale anymore, it closed last week. My loan for the purchase cleared underwriting two weeks ago but we can’t close because the seller’s attorney did not order the coop stock certificate from the bank soon enough. In the meantime, the short sale has showed up on my credit report – my score went from 790 to 680 – which is still considered good.

    My question is the following: Could you buy a place with a credit score of 680, after doing a short sale? I am worried that if my current bank sees this change they will cancel the deal.

  16. 16
    marilyn Says:

    We completed a HAFA short sale last February 26.We have never been late and never missed payments.My credit scores before the short sale were 779,776,757(transunion,equifax,experian).The bank already reported the short sale.My credit scores dropped already to706,702,702..However,we had 2 mortgages ( with the same bank which is Chase)and the 2nd mortgage is not yet reported.I don’t know why it was not reported at the same time and i don’t know if it it’s still gonna drop my scores further.Anybody who has experience like this?Please post a feedback.Thanks,

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