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In a successful short sale a lender accepts less than what is owed on the mortgage so that the homeowner can sell their home at market value. While there is no “short sale” credit mark, the usual result is your mortgage being marked on your credit as “paid for less than full balance”,”settled for less than owed” or some similar language.
What will that do to a credit score? While it is a derogatory mark, there is no exact formula for how many points this will drop a credit score as it depends on every individuals entire credit picture. Also, some folks miss payments during their short sale, further dropping their credit score. Others do not and are able to close with few or no missed payments, easing the credit ramifications.
However, the main benefit of the short sale is not actually its credit benefit – it is the ability to be able to settle the balance on the mortgage debt. In the state of CT, lenders are allowed to pursue foreclosed homeowners for deficiency judgments.
What this means is that if you simply let a home foreclose, you can still be pursued for the balance on the loan. In a short sale we are able to negotiate terms of debt settlement with the lender and we do successfully receive a full deficiency waiver over 95% of the time.
The other main benefit of a short sale is a quicker resolution over foreclosure. Foreclosure in CT can take as much as a few years. That is a few years of missed payments, followed by a foreclosure on the credit which results in a much longer recovery time overall. After the foreclosure is over, it could take as many as 4-7 years to qualify for a new mortgage. The average short sale takes 4-6 months from beginning to end and will generally keep you from qualifying for a new mortgage for 3 years. The 3 year period is not due to the credit score itself, but instead to lender guidelines for writing new mortgages.
All the clients that have reported back to me about their credit after their short sale have reported a quick recovery to their credit score, and just a few years later I have been able to get many of these same former short sellers into new homes again.
Is a short sale a perfect solution with no ramifications? No, nothing is.
Is it likely one of the very best ways to cure an over-leveraged mortgage situation and move on quickly? Absolutely.