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Dear Liz: In 2005, I purchased a town home for my children, and they have since vacated the property. The town house is now worth 60% of what I owe, and I am considering a short sale. All my other obligations are current with no late payments in years. My credit scores are over 800 and my only other debt is a car payment. After a short sale, what kind of hit can I expect on my credit score, and about what would be the recovery time for my credit score?

Answer: The creators of the leading FICO score haven’t revealed enough about how the formula works to predict precisely how a short sale would affect your scores. But the company has said the affects of a short sale are similar to that of a foreclosure, which would cause someone with a 780 score on the 300-to-850 FICO scale to lose 140 to 160 points. People with higher scores tend to lose more points to a black mark than people with lower scores, so you can pretty much assume that your scores will drop from excellent to near-subprime territory for a while.

Exactly how long your score will take to recover is another mystery, although you’ll start to see gradual improvements if you handle your other credit accounts responsibly. Your scores could climb back into “good” territory (over 700) within a couple of years, but you may not regain your lofty peak until the short sale falls off your credit reports in seven years.

You also should be cautious about any agreement you sign with your lender. Some short sale agreements don’t address what happens to the unpaid debt, while others specifically keep you on the hook for any deficiency balance (the difference between what you owe and the price the home fetches). Ideally, you would want this debt to be forgiven (although you may owe taxes on the forgiven debt). Otherwise, the lender could sue you and cause further financial and credit score problems.

If a short sale is indeed your best option — you can’t rent the place for what it costs you to own it, and simply wait for prices to rebound — you’d be smart to get experienced legal help.

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I totally agree with the advice to be cautious before short selling, and I’ll add this — if the lender does agree to write off part of the balance, this is likely to have tax consequences for the borrower.


If it’s a primary residence, probably not. The Mortgage Forgiveness Debt Relief Act excludes forgiven mortgage debt for most (though not all) homeowners. The IRS has the details here.


I’m an agent working with shortsales and we’ve been told that short sales have less of an impact on your credit score than shortsales and a short sale will fall off your report after 2 years.
Where can I get accurate information I can give to homeowners about the effect and time frame of short sale vs foreclosure?


Not sure who told you that, but clearly you weren’t getting accurate information. You may be able to get another mortgage two years after a short sale, compared to up to a 7-year wait after foreclosure, but the negative mark won’t fall off your credit report in two years. I get my info about how FICO scores work directly from the company that created the formula (Fair Isaac, now also known as FICO). They have seminars and other info for real estate professionals.


[...] much assume that your scores will drop from excellent to near-subprime territory for a while. – Short sales can trash your scores, reports Ask Liz Weston. See what kind of damage your credit could take if you go down this [...]