Bracing for how a short sale hurts your credit

Hoping to get a different answer then you believe.

You seemingly already made the hard decision. The short sale is your way out, or close to it, and you are not here to be talked into or out of it. I respect that. Instead, you are here to do something deeper but related. You're wondering what it costs you after the house is gone. And specifically, if this will hurt your credit? You already feel like you know the answer but you want to make sure so you can make the best decision for you. My hope is I can help you do that today.

A hard truth about the door you chose

I know. You are quietly hoping that because a short sale is the harder, more deliberate road, your credit comes out gentler than it would from a foreclosure. I wish I could tell you that was true. FICO looked at this directly and found no meaningful difference in the credit hit between a short sale, a deed-in-lieu, a settlement, and a foreclosure auction. To the score, a short sale lands about the same as the foreclosure you are working to avoid. To the report, it will appear as “settled” or “legally paid for in full for less than the full balance”.

I know that is not what you were hoping to hear. It does not make the short sale the wrong call, because people choose it for real reasons that matter to them. It just means the reason is not that your credit score comes out ahead if foreclosure is your other option. These may not be your only options, and we Transitus are happy to show you what’s possible.

It was the missed payments, not the words short sale

Here is something that feels like both a win and a loss and I get it. The biggest driver of the damage is not the label short sale. It is the missed payments that led you here. Payment history is the single largest piece of a FICO score, about 35 percent of it. And the reporting starts early: once a payment is 30 days past due it can land on your credit, and even one late payment can pull the number down 50 to 100 points.

So by the time a short sale actually closes, if you have missed payments, a great deal of the drop has already happened. I know that’s not exciting news to hear on its own, but that can change how you think about this. The short sale is not a fresh, separate catastrophe dropped on top of an untouched score. It is mostly the same wound the hardship was already causing. And if you have managed to keep any payments current through this, that is the real win for you and your credit score.

The seven years, and the truth that it fades

You may now be counting the cost to a future version of you who still has to rent, borrow, rebuild and hopefully own a home again one day. You’re wondering how long this could impact you and it’s a scary question to ask. The negative marks from this, the late payments and the rest, can generally stay on your credit report for seven years. Add this all up and your credit can drop anywhere from 50 to 160+ points during this draining process.

I won't dress that up. It is a long shadow. But let’s sit with two honest things inside it. How far the score falls depends heavily on where it started, and the higher your score was, the further it drops, which feels backwards but is simply how the math works. And 'fully recover' is the far edge, not the whole story. A score is not frozen for seven years and then healed overnight. It climbs back gradually as these marks age and the rest of your credit stays clean. It is not permanent, even when it feels like it will be.

Whether the debt follows you out the door

One final let down that I need to give to you. In a short sale regularly a deficiency can follow you out the door. What does this mean? It is the difference between your debt and what your home sold for. So, if this is reported by your lender it can have a larger impact on your credit as well as a debt you need to repay. For a single win today, deficiencies get waived all the time so please see if that’s possible for you.

A space and path to get back on your feet

With all of this I want to give you both some hope and some practices to help you recover if you need it. Here are some of the best ways to improve your credit moving forward and help you get back on your feet.

• Pay down debt to help improve your credit utilization ratio
• Pay all loans and credit card payments on time
• Don’t close existing credit cards
• Ensure you have active credit being used to help build your future credit

You already did the hardest part

You did not come here to be comforted. You came to know the true cost before you walked through the door, and now you do. That instinct, wanting the real number instead of a soft one, is you protecting the version of you on the other side of all this. Whatever the score does in the meantime, it does not get the final say over what comes next for you. That I am sure of and I wish the best of luck to you and your family.

This article is general information from Transitus, not legal, financial, or tax advice. Foreclosure rules change and every situation is different. Transitus is not a foreclosure consultant (CRS 6-1-1103) and charges no upfront fees. For free help, call the Colorado Foreclosure Hotline at 1-877-601-HOPE or consult a Colorado real estate attorney.