January 2, 2008
Short sales credit score
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? 
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. Let's briefly discuss what I would do if I were to buy a house today, in your situation.
How to buy your next house after a short sale even with bad credit
I would look at neighborhoods I liked. I would discretely inquire how much is owed on a house I liked. I would look for houses where the sellers owes about as much as the house is worth, or a bit less. Then I'd make an offer where I would buy the house and continue to make the seller's payments to their bank. In other words, I wouldn't go to the bank for my own loan. I'd simply start making the seller's payments for her.
This is called "buying subject to existing financing" and it is a wonderful way to buy real estate. You are not assuming a loan. You are not qualifying for a loan. You don't generally have credit checks. The only requirement is that the loan you are buying "subject to" is not a "toxic" loan. Make sure it isn't going to reset, or adjust upwards, or that it is not a negative amortization or balloon payment type loan.
If the house you want is worth, say, $300,000, and the loan is $250,000, you can offer to buy the house and pay the seller $50,000 at closing, and then take the house subject to the $250,000 loan. If you do not have $50,000, you can request the seller take back a note for, say, $50,000, in which case you have a zero down payment situation. You think this is difficult to get a seller to agree to this? Then you haven't met a motivated seller. A motivated seller is someone with an empty house they are making payments on, while they live somewhere else. Or a seller who has gotten a divorce and must sell the house now, no matter what.
I hope this has been helpful to you. I have this entire system explained in detail in my Mortgage Relief Formula, available for shipping and handling for home examination. You also will be able to take part in a conference call later in January where we will be explaining more about how to sell your house nine days from today, without a broker, without fix-up, and get the bank to accept the sale so you can complete your short sale. This nine day house sale method works even when there are "no buyers" allegedly. All this and much more is covered in the book and audio CDs.
Watch this important video on short sales and keeping a good credit rating
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22 Comments on Short sales credit score »
July 12, 2008
Janice @ 9:22 am:
I recently did a short sale on my home in April of 08. My mortgage company ruined my credit even more so that we canot purchase a more affortable home for my family there is a delinquece on my credit report from the short sale I thought the whole idea of a short sale was that the mortgage company would forgive the rest of the remaining the of the house now there saying that were responsible for the rest now it is showing a big amount on our credit report and now no bank will give us a mortgage to provide for my family. I think we have been scamed with this mortgage company. It shows up on my credit report as a delinq. Do you have any suggestions on what to do.
Hi Janice, sorry to hear that. For others reading:
1. Make sure you get a written agreement with respect to your lenders. They may approve a short sale, but that doesn't mean they forgive the unpaid amounts. They are two separate issues. If your written agreement does NOT contain a provision that says "We, the lender, forever release you from any unpaid amounts," in legalese, then they can come after you later.
2. They can come after you later in most cases but not all. In states like California, the foreclosing lender cannot come after you for unpaid amounts.
3. Don't listen to me without checking into things for yourself as I am not a lawyer.
So, now that you are in this situation, let me address it, Janice.
You can always settle these types of things. Settle by signing a note for part of the amount in exchange for an agreement where they release you from all liability. In that agreement, they agree to retract derogatory reports to your credit bureau. They will say they can't but they can do this and they will if it's a condition of settling.
warmly
–Richard
Richard Geller @ 9:51 am:
I do have some suggestions. I am going to write a piece on this. Get on my list if you aren't already and you'll get the response which will be quite detailed. Thanks
–Richard
July 21, 2008
Colleen @ 7:25 pm:
Hi, my husband and I are living in an unfinished subdivision in MI. which is a very a bad economy like most other places right now. There are a few homes for sale in our sub because of the fact that the builder has gone out of nusiness and another builder has come in to build homes at a much lower price. Our home is probably worth at least $40,000.00 less than we owe on it and we're getting very nervous that we will never get our money back out of it. We're afraid of our credit being ruined and obviously don't want that, but we are thinking about doing a short sale to help us get out before it's too late. We're afraid that we will get stuck paying the bank back a ton of money and even if we find a house for a lot less money, we will end up in the same situation, only in an established neighborhood with possibly an older home. Our home is just 3 years old and we're in an interest only loan. We just don't want to do something this drastic if it's not a good idea. I'm very afraid that our home will never be worth what we paid for it and it will be a horrible investment that we somehow have to recover from when we should be thinking about retirement. We're primarily concerned with our retirement and ending up in a horrible situation. We're in our late 30's now and have 4 children. Any help you may be able to offer us while we educate oursleves would be greatly appreciated. Thank you so much for any assistance you can offer.
Colleen
January 17, 2009
annmarie @ 10:10 am:
Hi Richard, Here is my situation. I purchased a condo 2 yrs ago for 145,000. It's now worth 95,000!. Ouch. I owe 138,000. Unfortunately, I have an arm that will adjust, but not for two more years. Since I have purchased I have become disabled and have had such a difficult time paying the mortgage. It does get paid on time every month. Should I wait out the two years in hope the market goes up? Should I do a short sale? I dont want to ruin my credit either. Some say I should buy a new house elsewhere and rent out the condo? I dont have the money to buy another home. Please help.
Don't assume the market is going up in two years.
Whatever you do, do not assume that.
Why not do a short sale?
It doesn't have to kill your FICO score.
warmly
–Richard
January 23, 2009
Robyn @ 9:42 am:
My husband and I purchased a home in Biloxi, MS in June 2007. He is active duty military and we were forced to move to Illinois in August 2008. Our home has been on the market since June 2008, for less than we paid for it. My current list price is equal to my break even with the mortgage after realtor commisions are paid. I have no wiggle room for buyers closing costs. My realtor suggests we need to lower 10K to be competitive. We asked our bank about a short sale in September, and were told our FICO was over 800 & we never missed a payment so they couldnt help us. Has something changed since then that would convince them to help us? Our savings is tapped as we have been paying rent in our new city while maintaining an empty house 1000 miles away. I dont understand how to convince our bank to consider a short sale, nor do i understand how that would not effect our credit if the bank can term it however they want with the credit bureaus. We do not intend to buy another home until my husband retires from active duty in 10 years, but we will still need our good credit to be able to rent in each city we move to. What are our options? Thank you, Robyn
Don't ask your bank, just get a short sale contract. Sell at whatever price it will sell for, then put together a short sale package and get out of this thing. Also, note that this doesn't have to greatly affect your credit. And you don't need to miss a payment even though they will tell you that you do have to. Many people have done short sales without missing payments. Simply find a buyer, put a good short sale package together, and forward to your lender and then start to bug them so they assign it to a negotiator.
warmly
–Richard
February 10, 2009
Shana @ 1:02 pm:
Hi, I did a short sale. My mortgage company said that I had to be 2 months behind to be approved. The sale is now 15 months old. I was told that I could get an FHA after it was 12 months old. Is this true? What other bank finance options are there?
I believe it was changed to 3 years so you won't be able to get FHA financing for that long. There is an exception for hardships so it may be possible still. That is the best bet today as private non-government lending is very difficult.
warmly
–Richard
February 16, 2009
syed ahmed @ 11:34 am:
Richard, i did the short sale in December of 2008 and i have two lenders,second lender sent me a 1099c few days ago for 40k and plus both has reported very badly on my report and my score is in the range of 500 low and i want to buy the house. Can you please help me to take this negaative thing out of my report? waht are my options? how you wnat me to approch this? i still have my other accounts are opens if i start buy and paying on time it will increase my fico?
There are several options. You can offer to settle if you still owe any money to the lenders, settle for a note, and also in exchange for their retracting the derogs from your credit. You can also make a case to the credit bureaus that the lenders agreed to retracting the derogs, if this is true, and the credit bureaus will "investigate" and may drop the negative report.
You can also approach the lenders even if you have settled, and offer to pay for a deletion of the derogs. They may agree. The payment can be in the form of a series of payments if you don't have much cash now.
If you want to buy a house, I would suggest you do so "subject to" existing financing and you can have horrible credit and buy a beautiful home and be the owner (not a renter). I do explain this in my Mortgage Relief Formula course.
warmly
–Richard
March 6, 2009
Steve @ 2:57 pm:
Richard, We have a property that we are selling but with the second mortgage we own more then what we will get. We will be able to pay off the first but the second will only get about 1/4 to 1/3 the balance due. We also have discharged bankruptcies and the home was not reaffirmed. If the second reports the loan on the credit as a negative mark can this be removed since the actaul liability was included in the discharged bankruptcy. Discharge was more then 3 years ago so if the second reports as a short sale I have to wait longer to try to get a new mortgage, is this correct.
April 21, 2009
Lynn @ 9:44 am:
We did a short sale was sharp about it. Before we accepted the offer we called the bank told them the and asked that we would not be held accountable for the balance owed if any, and that they would correct the credit to not show late. We drew up a contract had it signed by the acting person and ourselves along with a notary. When we accepted and offer on the house we put in there the terms we had perviously agreed on then signed. We went to closing with a closing statement showing that ZERO balance and correctling the credit. We submitted the copy of the notarized closing statement to the credit reporting agencies and they removed them. Alot of work yes but well worth it to keep your credit score after hard time.
April 27, 2009
Tami @ 7:55 am:
I am considering a short sale for my home. We owe $620,000 on our house and the homes in our neighborhood are for sale for $350,00 or less. We are already 60 days late on our mortgage and would like to know if we short sale will we be able to purchase a more affordable home ($350K-$400K) immediately after with our credit. We already have poor credit with the late payments score 550.
April 30, 2009
Jeff @ 9:09 am:
I did a short sale in Nov of o5 They are showing it settled and closed on my credit report. they are also showing a zero balance. However they continue to report me 120days late even though it says zero balance and that the account is closed and settled. This is keeping me from being able to get a new loan and I have been writing letters to the Mtg company trying to get the Account Status of 120days past due removed on my credit report. Can they legally keep reporting like this even when there is no balance and the loan is closed?
What you can do is write to the credit bureaus directly.
Challenge the lates. Show them the evidence that you have
done the short sale and therefore this is paid and
accepted for an amount less than what was owed, and
therefore is SETTLED.
They will initiate an investigation which nine times out
of ten will result in nothing being heard from the lender
and 30 days later those will come off.
warmly
–Richard Geller
Jeff @ 9:48 am:
Richard, I did a short sale in Nov of o5 They are showing it settled and closed on my credit report. they are also showing a zero balance. However they continue to report me 120days late even though it says zero balance and that the account is closed and settled. This is keeping me from being able to get a new loan and I have been writing letters to the Mtg company trying to get the Account Status of 120days past due removed on my credit report. Can they legally keep reporting like this even when there is no balance and the loan is closed?
What you can do is write to the credit bureaus directly.
Challenge the lates. Show them the evidence that you have
done the short sale and therefore this is paid and
accepted for an amount less than what was owed, and
therefore is SETTLED.
They will initiate an investigation which nine times out
of ten will result in nothing being heard from the lender
and 30 days later those will come off.
warmly
–Richard Geller
May 1, 2009
Brian @ 9:57 pm:
I am relocating to another state. I currently live in california and owe about 325k, its worth around 180k. The loan is through WellsFargo and is a VA loan. The new job offers to buy my home at market value if I try and sell it for 90 days. I would like to short sell it either before the 90 days or to the company contracted to buy the house. What issues will I have to over come. I figured if I got 180k + the 80k the VA would paythis would still leave roughly 65k the bank would have to eat. Also I do not have a 2nd. I also would like to buy a home at my new location (I assume I will need to wait a few years), so I dont want to hurt my credit as much as possible.
Hey Brian, haven't talked much about a VA loan and so I am glad you brought up your question.
The Veterans Adminstration will consider a short sale, which they call a compromise sale, in the case that you have to relocate and your house has fallen below the value of the loan.
They may ask you to sign a personal note for some of the deficiency in some cases.
You first find a buyer and make the sale subject to approval of the VA. You contact your lender, who services the loan, and submit he usual short sale package to them along with a compromise agreement sale application.
The VA will end up paying the lender to make up for their financial loss, as the VA has guaranteed your loan.
The VA says they will consider doing another VA loan if you have a satisfactory credit history for 12 months. A loss incurred by the VA may lower the amount you would be entitled to borrow on your next house.
Of course, there is a lot to be said for renting. And there is a lot to be said for buying "subject to" existing housing and not having to be a homeowner at all. I have a course that teaches how you can buy a house without using your own personal credit and you can be a homeowner no matter what your situatino and with little or no cash of your own:
http://www.BuyingWithBadCredit.org/
May 31, 2009
Laura @ 6:06 pm:
I had a short sale back in Feb. 2008. I had two mortgages. The first was paid in full and closed with a zero balance and three late payments. The second mortgage was paid in full for less than owed with a zero balance along with two late payments. Experian states this will be on my record until Sept. 2014 and Trans Union states this will be on record until Nov. 2014. Is there a way to fight this since after 3yrs I should be able to qualify for a FHA ? My husband and I would like to buy another house next month and since I can't qualify because of the short sale we decided to do a lease option for 24 months. I need to know that at the end of the lease I will be able to purchase the home through a FHA. Any advice you can give would be greatly appreciated. Thanks, Laura
June 29, 2009
Anthony @ 3:42 pm:
i bought a house for $300,000. and now it is worth $200,000. I would like to short sale the house but I have cash assest. I have $80,000 in cash and about $150,000 in my 401k. I live in california. I just want out of my condo. Can I short sale without losing my money? I not worried about my credit, I just want out of the house.
Also can I buy another house? without the bank putting liens on it if I foreclose the first house?
In California.
July 7, 2009
Martha @ 8:16 pm:
How long a short sale stays in your credit? I have not paid my home since December of 2008, and I have tried to do a loan modification and the bank has denied me. Now I want to do a short sale and buy another house in a year, but I am worried about how long the short sale will be in my credit report and if I will be able to buy another house because the short sale. Please advise.
Maria
July 27, 2009
Shaunie Li @ 8:11 pm:
Hi Richard:
I just visited your website and it helps a lot. Currently, my agent is doing the short sales for my condo. THe agent is a specialist for short sales. I owe two banks with first and second mortgage. The first is Countrywide with $119,000 and the second is with Suntrust 10,700. The sales price has been dropped two times and now is $105,000. I recently divorced and the court order sells the condo to settle with my ex-husband. I have been renting the condo for 5 yrs and I am tired of renting it now and I also lost my job. My agent said if she receives an offer, she will discuss with banks and she thinks that the bank should approve. I am current with my payment. My questions:
1. Will short sale hurt my credit?
2. Can I still get a loan in the future? My agent said that I can not purchase any property in 2 or 3 years after the short sales.
3. I own another property. WIll the bank come to my another property to get the money?
4. The tax for the condo is due on Aug. 31. Should I pay for the tax?
5. I have about $22,000 balance for two credit cards. If the short sale hurts my credit anyway, should I go ahead to do the debt settlement for the credit card?
6. The court order said that my ex-husband will share profit with me for the condo sale. There is no profit. WIll he share the lost with me? The tilte and loan for the condo is under my name.
7. I have checking accounts with both banks. Shoud I not leave any money in the checking account just in case that the banks get the money from the checking account for the short sales?
Thanks for the questions and l look forward to hearing from you soon.
July 29, 2009
Fiona Barone @ 10:26 am:
Dear Richard I am a Realtor in NJ. I just picked up a client who is upside down, he owes way more than what the home is worth. He is not delinquent on his mortgage, we are attempting a short sale so he can purchase a smaller home and comfortably make the lower payments. I found this website and your comments extremely helpful, I will forward it to my clients, as they are nervous. Thank you for taking time out of your life to help others
Sincerely, Fiona Barone
September 22, 2009
Susan Elgar @ 12:35 pm:
Dear Richard
My husband and I have a house that we live in in AL. He also have 2 condos in Gulf Shores. The 2nd condo , we purchased in 5/05 at the peak of the condo real estate sales. We paid $550k for it and it is now worth about $300k. We have 1st and 2nd mortgages that total about $4k a month that is killing us, although we are current with payment. I have asked for a the bank to reconsider our loan and they flat refused. I have checked into a short sale, but my husband is extremely fesrful of loosing our perfect credit rating. I can not justify "throwing" this money away every month. Rentals for it have come to a virtual standstill due to the economy. I cannot foresee that the future is going to take much of an economic boost for condo sales in AL and our ARM will come due in Jan 2011 and we will be FORCED to do something. Should we consider the short sale now or continue to save our creit rating by "throwing" this monthly payment into the "deep black hole" in the hope of a miracle??
Thanks for any advice
Susan
November 4, 2009
Elizabeth @ 9:55 am:
Dear Richard,
I have been approved for a short sale with Chase. I have had an offer on the house since May and it is just now closing. Fortunately, the buyer has stuck with us. The contract had a provision that the sale was subject to Chase negotiating the credit reporting to show paid-settled. Chase demanded we remove this provision before we could proceed. My realtor suggested I negotiate this later on after we got approval. Now, we are about to schedule the closing, and my realtor is refusing to help me. She says there is no way they will agree to negotiate on the credit reporting. Is this true? I am trying to get through to the negotiator with no luck so far. I feel like this took 7 months due to Chase's continued delays, it was through no fault of mine. I shouldn't have to accept a 7 month delinquency on my credit report. Any suggestions?
Thank you!
Elizabeth
January 19, 2010
melissa @ 8:06 pm:
Dear Richard,
My situation is very similar to Elizabeth's, only MUCH WORSE. After relocating to another city and leaving behind a house that was worth about $50,000 less than I owed on it, I applied for a short sale with Bank of America. I have a buyer that has stuck by me for…..TWO YEARS. For those two years Bank of America has repeatedly "lost" my file, fired my negotiators, etc. etc. etc.
I now have 24 delinquent payments on my credit score, and Bank of America will not communicate with me. My agent says that the last time she was able to get them on the phone, they indicated that we might close within the next 60 days.
I want to buy another home for my family. Is there ANY alternative to waiting for 2-3 years after the closing? What if it NEVER closes? I now live in a very healthy market area, and the only people cutting great deals are the new home builders. I have to take out a mortgage to buy from them.
What should I do? Is there any hope for my situation at all? I'm so sick of approaching people about "taking over" their payments only to be turned down cold.
Thanks,
Melissa
February 5, 2010
Kathleen Kowall @ 8:17 pm:
Hello,
I recently finished a short sale and thought I was totally done. However, was very unnerved when I read a CNN article that depending on the closing docs,,, you could be pursued for delinquencies?
The wording in mine that made me particularly nervous was the part that said NOTE: Except as stated above, all provisions of the note and security instrument shall remain in full effect? Can they pursue me?
The statement before says… "Once all conditions set forth have been met, EMC will execute a full satisfaction and release of mortgage and, if applicable, foreclosure activity will cease."
The Note sections seems to cancel out the part where I am free and clear no??