I am a CPA, former tax accountant with KPMG and have a credit repair company based in Dallas. Many of my clients are real estate investors throughout the US. For the last year there has been substantial interest in how short sales affect a credit score. I have heard so many incorrect explanations that I felt compelled to set the record straight.
Bottom line - if you complete a short sale and don't have any late payments on your mortgage, then your score will not be affected. However, there is usually a notation on your report that says "settled for less than full amount". A simple statement like this will not lower your score, but it will catch the eye of a potential lender and may negatively impact their approval process.
In most short sale cases there are usually late payments on the mortgage that lead up to the short sale. Any late payment on a mortgage will have a substantially negative impact on the credit scores. The exact decrease in score can not be accurately predicted since it will depend entirely on the unique credit profile of the borrower.
In addition, many lenders will require the borrower to have suffered late payments before they will even consider approving a short sale.
One strategy for the borrower is to ask the lender, as a condition of the short sale, to report the loan as "settled in full". You have about a 10% chance of them agreeing to this, but it is worth asking. You may even be able to get the lender to remove the late pays, but this is even a bigger long shot.
Many people have been contacted by credit repair firms or seen comments on the internet that state they can remove the short sale from the credit report. This is not entirely true. Legal credit repair companies follow the provisions of the Fair Credit Reporting Act in order to get derogatory items removed from a consumer's credit reports. A statement such as "settled for less than full amount" is not considered a derogatory item under the credit laws and therefore, the credit laws do not apply. The late payments are, of course, considered derogatory.
Late payments have the potential for being removed, but if they are relatively recent (last 12 months) it will be very difficult.
There are also issues surrounding deficiency judgments and forgiveness of debt, but that is for another posting if anyone would like to know.
I hope this is helpful. If anyone else has questions concerning credit scores or repair please feel free to email or call me. Remember that I am an accountant not a salesman.
You may contact me at ***-***-**** or email *****.*****@*****************.***. Good luck and take care!
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