How Does Short Sale Affect the Borrower’s Credit?

The short sales that I have seen on credit reports have appeared as “Paid Settlements” on a mortgage account. In the wake of the current mortgage crisis, short sales are becoming extremely common, but legislation has not caught up with the tidal wave and there is no law on the books relating to them to date. As a result, there is an opportunity for the borrower to negotiate credit reporting with the lender. I’ve seen several successful negotiations, so be sure to let your borrower know that it is possible.

A short sale proves that the borrower is exhausting every effort to pay the loan. The borrower has willingly committed to taking on months of emotional and physical stress in a good-faith effort to sell the property to maintain a good relationship with that lender. Most likely, the reason they can’t afford their current mortgage is because they were in an adjustable product and their mortgage payment has doubled. That doesn’t mean that they can’t afford a different loan program with a lower payment. There is no incentive for lenders to NOT negotiate with the borrower on how the item is reported to the bureaus. All they would be doing is cutting off a pretty substantial future income stream if they put these types of borrowers out of the market for two years. In that light, negotiation for a non-report on short sales is well worth it.

Here are the credit reporting options in preferred order:

• Paid As Agreed or Paid - Won’t hurt the score at all as long as the borrower has kept payments current.
• Unrated – May drop a few points.
• Paid Settlement – Credit scores will drop 50-150 points. 

If reported as a paid settlement, the item will remain on the credit report for 7½ years from the date of the first late pay that led to the paid settlement.

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