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The Lowdown on Short Sales, Finally

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short saleFor those of you who aren't quite sure of the meaning, a short sale is when you sell your home for less than the amount you owe, with your lender's permission.

For example, if you owe $100,000 on a home that is now worth $80,000 you're not going to find someone to pay $100,000 for it.  But you might find someone willing to pay $80,000 for it.  Now you have a choice.  You can either bring $20,000 with you to closing, if you have it.  Or you can try to convince your lender to accept $80,000, eat the $20,000 deficiency and consider the loan paid in full.  If they agree, you are well on your way to completing a short sale.

The volume of short sales has skyrocketed. According to Alex Charfen, CEO of the Distressed Property Institute, an organization that trains real estate professionals how to facilitate short sales, and confers the CDPE designation: "In January 2010, Bank of America received 50,000 short sale inquiries compared to January 2007 when they processed a total of 7 short sales."  Many years ago, many homeowners would have found their mortgage lender to be more difficult than helpful when the topic of short sales came up.  Today, however, according to Charfen, "Bank of America, Citi, Chase, WAMU, Wachovia, and Wells Fargo have been great about it."

The problem now isn't so much knowing what a short sale is but more so getting accurate information about how it impacts your credit reports and credit scores.  There is an enormous amount of incorrect information floating around regarding the impact of a short sale on your credit scores.  Some people claim that a short sale will never show up on your credit reports and therefore will have no impact to your scores.  This is correct, and incorrect at the same time.  "A short sale is not reported on a person's credit history, but I have seen them show up as Paid as Agreed, $0 Balance Due, Charged Off, Settled and even Charged Off and Owing", says Charfen.
The reason there's no way to specifically report a "short sale" to the credit bureaus is because there is no "short sale" option from the pre-existing list of credit reporting codes.  According to Norm Magnuson, Vice President of Public Affairs for the Consumer Data Industry Association, the trade organization of the credit reporting agencies, "For credit reporting purposes, a short sale is considered to be the same as paying an account in full for less than the full balance, therefore a new code was not assigned."  What he is referring to is a settlement, where the lender takes less than they're owed and considers the loan paid in full.  There are already pre-existing credit reporting options for "settlements," and since a short sale is a settlement with a fancy name, the use of the existing credit reporting option is sufficient.

A settlement, however, is one of the seven deadly FICO sins, so the impact on your scores can be profound, especially if you have good credit otherwise.  The impact is going to be the same as a foreclosure, charge off, collection or other serious delinquency.  It can impact your ability to get a job, car loan, credit card, insurance or any other product or service that uses credit reports and/or credit scores to assess risk.

A short sale is not clean, as many would have you believe.  Just because your credit report doesn't say "Short Sale" doesn't mean your credit is home free.  Suggesting that the absence of the exact wording somehow makes it benign is selectively omitting the most important part of the story.
There are even real estate agents who claim to be able to convince your lender not to report the settlement to the credit bureaus.  If this is true, and I haven't seen one example or any evidence supporting the claim, then the credit bureaus won't know that you sold short.  And since credit scores are solely based on credit report data, the lack of any settlement reporting means your scores would not be affected.  It would also be blatant misreporting by the lender and, according to a consumer credit attorney who agreed to be interviewed under the condition of anonymity, "I think that would violate the Fair Credit Reporting Act."  I'm also reasonably certain the credit bureaus would frown upon the withholding of the loan's true disposition because the next lender down the line would not know about the settlement and might approve a loan application for someone they would have otherwise declined.

The bottom line is that short sales don't show up on your credit reports, but that's really wordplay.  They do show up, but in the form of a settlement (I've also seen it listed as a charge off).  There simply is no fully clean way out of a bad mortgage and a short sale is no exception.  Sorry folks, don't shoot the messenger.

Still have questions or know someone that may be in need. Call or email me today for an informative consultation … my services may be available to you for free but my expertise is priceless.

Eileen Scates, CDPE (321) 229-2265 or This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

—Originally Published on Credit.com 2010

 

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