Credit Scores Plunge In Short Sale

Do I need to stop making payments for my bank to consider a short sale?

Lenders have different policies on short sales, which is when they agree to let a borrower sell a home for less than what is owed on the mortgage. But expect your credit scores to take a major hit, no matter whether you stop payments first.

A short sale typically will have the same effect on your credit scores a s foreclosure, according to Fair Isaac Corp., the company that created the leading credit score blows, from a missed mortgage payment to a foreclosure or a short sale with a deficiency balance (the difference between the home sale proceed and what you owe). some with FICO scores in the 780 range would lose 90 to 110 points with single skipped payment. A short sale or foreclosure would trim 140 to 160 points from that 780 score. (You can see the charts at Fair Isaac's Banking Analytics Blog: http://bankinganalyticsblog.fico.com/2011/03/research-looks-at-how-mortgage-delinquencies-affect-scores.html ). Your score will plummet that far whether or not you stop making payments.

You might be able to reduce the damage from a short sale if you can persuade the lender to report the deficiency balance to the credit bureaus. Short sales without a reported deficiency balance would trim 105 to 125 points from a 780 score, according to Fair Isaac. But lenders that have been cajoled into a short sale often aren't in the mood to grant you additional favors.

There are some advantages to a short sale over a foreclosure. One is that you can start the long road to credit recovery sooner because foreclosures usually take much longer than short sales. Then other good news: You can qualify for another mortgage faster. Lender typically will consider you for a home loan 2 years after a short sale, versus a wait of up to 7 years if you let the lender foreclose.