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Short Sale Information

Short Sale Articles

Short Sale Effect on Credit

The short sale has been widely touted as the best alternative to foreclosure. And for the most part, it’s true: it’s faster, less costly, and much less stressful. But many people are thinking twice because of the short sale credit effect. How does a short sale really reflect on one’s credit report? Should a seller be worried about it? This page explains how short sales can influence your credit score and what you can do to reduce the damage.

Point Drops

According to Fair Isaac, originator of the FICO score, a short sale and a foreclosure can have more or less the same effect on the credit rating. However, a short sale’s impact is easier to reduce. Both will pull a score down by an average 85 to 160 points, not including the effect of the default. Bankruptcy, on the other hand, can reduce one’s score by up to 240 points, so the short sale effect on credit is actually mild in comparison.

Duration of Default

Usually, what causes the biggest point drops isn’t the short sale itself, but the missed payments that led to it. The average short sale seller is about 60 days behind, which lowers a score by 70 to 110 points in addition to the short sale itself. But since it’s possible to do a short sale without being in default, the short sale credit effect can be as low as 30—although few banks are willing to do short sales on loans with good standing.

How Short Sales are Reported

How the bank reports the transaction also influences the short sale effect on credit. A short sale usually turns up as a “pre-foreclosure in redemption,” which means the home was already in foreclosure but was saved from being seized by the short sale. This adds a loss of around 200 points, bringing the total on average to be around 300.

Short Sale vs Foreclosure

So is it still worth it to choose a short sale over foreclosure? Experts say it’s still a big advantage, considering the short sale credit effect is still lower than that of a foreclosure. The total point drop on a foreclosure can total 400 or more and will stay on record for ten years, whereas a short sale can be cleared in about five and will allow you to buy a new home shortly afterwards.