What is the Credit Impact of a Short Sale
When a property is sold as a short sale, the proceeds from the sale go to the lender. This assumes there is only one loan, one lender, or one loan servicer. If more than one loan, the lender in the second position must also agree to the sale and accept payment for less than what is owed.
When sold “short” the full amount owed was not paid. The amount not paid leaves what is referred to as a deficiency. The deficiency remains due to the lender after the lender is paid the proceeds from the short sale.
California is an Anti-Deficiency State
What happens with the deficiency? Some states have laws that prevent banks from collecting on deficiency payments. California has an anti-deficiency statute that protects borrowers after a short sale.
“The Supreme Court of California held that Code of Civil Procedure Section 580b prevents lenders from pursuing borrowers after approving the borrower’s short sale.” Coker v. JPMorgan Chase Bank (January 21, 2016.)
For the states that do not offer protection from deficiency payment obligations, lenders may:
• Start attempts to collect after the sale closes.
• Reserve the right to bill for the debt owed on the deficiency.
• In exchange for the approval, require borrowers to sign a promissory note.
• Turn the matter over to a collection agency.
Forgiveness for a portion of a loan is not a given. The lender must agree to forgiveness of the remaining loan balance. In other words, borrowers will not be held responsible for the debt. This is among the many reasons hiring a trained and experienced real estate agent is so important. The short sale negotiation process is fundamental to a successful short sale.
Short Sale vs Foreclosure | Credit Impact
According to TransUnion, Experian, and Equifax, the three nationwide credit bureaus, a short sale may be reported as “not paid as agreed”, which means the lender was paid less than the originally agreed loan amount.
From a credit perspective, according to the nationwide credit bureaus, there is no difference between allowing a home to go into foreclosure and a short sale. This is because both fall under the umbrella category of ‘not paid as agreed’ and most lenders do not make a distinction between the two when reporting to the credit bureaus. When reported in this manner, a short sale and a foreclosure remain on credit reports for seven (7) years.
A foreclosure may impact credit rating upwards of 200-280 points. This is a significant hit on credit.
If no better alternatives are available to you, then you want to consider aggressively pursuing a short sale.
It used to be that most lenders would not consider allowing a short sale until a few payments were actually missed. Because of this, you may also have a few “late payments” reported to the credit bureaus.
The market is ever-changing and many lenders today will consider a short sale if a homeowner can demonstrate a “hardship” or “impending hardship”.
Late payments and a short sale are not good marks to have on one’s credit. However, it is possible to organically restore one’s credit following a short sale within a couple of years. A short sale may impact a credit score by 80-100 points.
There is also the possibility through negotiation with the lender that you can avoid having the short sale reported to a credit agency. This is another important reason to hire an experienced short sale agent.
Short sale vs foreclosure? After weighing foreclosure alternatives, and the impact on their credit rating, only a borrower can decide if a short sale is the best solution to the inability to make their mortgage payments. If you need help, call Kathleen Daniels, San Jose Short Sale Agent, or request a consultation.