The Short Sale Series – The Short Sale Credit Score Myth

Homeowners answer with a fairly common refrain whenever asked why they are considering going the short sale route.   While it is true that some feel they have a duty to try and honor their agreement with the lender, the most common answer by far is that they want to salvage whatever remains of their credit score.

While we do not want to patronize our readers, we think it would be a valuable exercise to briefy discuss what a credit score is.  From Investopedia:

A statistically derived numeric expression of a person’s creditworthiness that is used by lenders to access the likelihood that a person will repay his or her debts. A credit score is based on, among other things, a person’s past credit history. It is a number between 300 and 850 - the higher the number, the more creditworthy the person is deemed to be.

A credit score plays a large role in a lender’s decision to extend credit and under what terms.  For example, borrowers with a credit score that is under 600 will be unable to receive a prime mortgage and will typically need to go to a subprime lender for a subprime mortgage, which will typically have a higher interest rate.

Given this definition, it is evident why homeowners would be interested in preserving their credit score.  Unfortunately, according to FICO, the company responsible for calculating the most commonly used credit score, a short sale has virtually the same impact on a credit score as a foreclosure or a deed in lieu of foreclosure.

In an illustrative blog post, FICO shows that, for individuals with similar credit scores, a short sale or a foreclosure will result in an identical drop in an individuals credit score.  Moreover, the time needed to return to your original credit score after either a short sale or a foreclosure is also the same.

Why do individuals still believe that a short sale is better for their credit score?  We have several theories.  First, homeowners often use the internet to seek confirmation of information they hope is true.  Given the wide availability of inaccurate information online, they usually don’t have much trouble.

Second, we frequently hear from homeowners who have been provided this information by a realtor claiming to specialize in short sales.  This is troubling.  The housing crisis has caused so-called “short sale specialists” to come out of the woodwork.  Many are reputable and can help a homeowner make the correct decision about whether to go through with a short sale.  Unfortunately, too many are driven by a desire to get a commission by any means necessary, including providing false information.

We recommend that anyone considering a short sale of their home consult with an attorney before entering into a listing agreement with a realtor.  A short consultation with an attorney with no vested interest in the short sale can provide the type of unbiased information needed by homeowners when trying to decide whether to go through with a short sale.

Eric Teusink is the creator of Legal Blog Atlanta. He is also a founder and managing partner at Williams Teusink, LLC, a law firm focused on providing solutions to complex questions in real estate and business law. Connect with Eric by following him on Twitter.

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