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Dear Liz: Do I need to stop making payments for my bank to consider a short sale? I moved and put my house on the market a year ago with no bites despite three price reductions. The only way I’m likely to sell it is to reduce the price below what I owe the lender. I want my credit to remain as good as possible, but worry that if I have to miss payments to get the lender to consent to a short sale my scores will be lower than if I had kept up the payments before selling short.

Answer: 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. You’ll need to talk to yours about what’s required. But expect your credit scores to take a major hit, whether or not you stop payments first.

A short sale typically will have exactly the same impact on your credit scores as a foreclosure, according to Fair Isaac, the company that created the leading credit scoring formula, the FICO. Fair Isaac recently released a chart showing the effects of various credit score blows, from a missed mortgage payment to a foreclosure or a short sale with a deficiency balance (which is the difference between the home sale proceeds and what you owe). Someone with FICO scores in the 780 range would lose 90 to 110 points with a 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://tinyurl.com/3eze2a5.) Your score will plummet that far whether or not you stop making payments before the foreclosure or short sale.

You might be able to reduce the damage from a short sale if you can convince the lender not 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 who’ve 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, since foreclosures usually take much longer than short sales. The other bit of good news: you can qualify for another mortgage faster. Lenders typically will consider you for a home loan two years after a short sale, versus a wait of up to seven years if you let the current lender foreclose.

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One important item missed in your article is the hardship situation which determines eligibility for a short sale. Just the fact that the house has not sold does not mean the borrower will be approved for a short sale. The borrower must show evidence that they can no longer afford to make the mortgage payment. Although there are extenuating factors that lenders will consider, as long as the borrower can and has been making the payments they will likely be denied the short sale anyway. A better option is to rent out the unsold house until the market improves enough to sell it.


Renting may be a good option if you don’t have to rent it at a loss. If the home is deeply underwater and cash flow negative, foreclosure may be better for the homeowner’s finances in the long run than continuing to let a property drain her savings. Her credit is likely to recover before the home’s value does.