Does a Short Sale Hurt My Credit?

This might have been the question of the year in both 2009 and 2010. Prior to 2009
nobody outside the mortgage industry had ever heard of a short sale. But with the
mortgage crisis still in full swing, everyone has heard the term.

A short sale occurs when your mortgage lender agrees to accept less than you owe
on your mortgage loan and then consider it to have a $0 balance. Don’t confuse the

terminology. It’s not “paid in full”, it’s essentially settled in full, which is very different.As of the beginning of 2011 there is no systemic way for a mortgage lender to report a
loan as being a “short sale” on a credit report. And real estate agents have taken full
advantage of this semantic issue and are misleading consumers into thinking short sales
don’t hurt your credit. What they’re not telling their customers is this…a short sale is just
as bad for your credit as a foreclosure.

While the verbiage “short” and “sale” can’t appear on a credit report, mortgage lenders
are reporting them as being “settled” or “charged off.” Both designations are accurate
because the lender has technically settled for less than the full loan balance. And,
they’ve likely charged off the deficiency balance (the remaining balance on the loan after
the home has been disposed of by the lender).

So really, the fact that a short sale can’t show up on a credit report is semantics. The
only way around the damage of a short sale is to convince your lender to not report the
loan as settled or charged off. I have heard of this being successful but I’ve never seen
it accomplished successfully. You’re essentially asking a lender to keep your secret
from the credit bureaus. That’s not something they’re accustomed to doing.

Now, if you don’t believe me that short sales are damaging to your credit scores maybeyou’ll believe FICO, the company that invented and maintains the FICO scoring system.
“Both short sales and foreclosures are considered negative by the score, because our
data shows us it’s very predictive of future credit risk,” Tom Quinn, vice president of
FICO scores at Fair Isaac Corp.” The claim that doing a short sale is not going to hurt
your score is false. It’s inaccurate.”

“To the FICO score, there is very little difference between a short sale, a deed-in-lieu or
a foreclosure — and we’ve been saying that to anybody who will listen, but this rumor
that short sales are somehow benign has persisted,” Craig Watts, a spokesman for Fair
Isaac, the maker of FICO scores.

Now don’t get me wrong, I don’t dislike short sales. In fact, I think they’re a great way
out of a bad mortgage. It’s certainly better than walking away from your home and
defaulting. It’s also better for the neighborhood because you are marketing your home
for sale and likely still maintaining the lawn. But to position a short sale as being better

for your credit than the alternatives is misleading.

“The Credit Guru”, Longtime FICO Insider & Credit Industry Authority President Of The Ulzheimer Group, LLC
John Ulzheimer is a nationally recognized expert on credit reporting, credit scoring and identity theft. He is the President of The Ulzheimer Group, the Director of Credit Education at DisputeSuite.com, Credit Expert at CreditSesame.com and the credit blogger for Mint.com. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. He has served as a credit expert witness in more than 150 cases and has been qualified to testify in both Federal and State court on the topic of consumer credit.

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