Short sale, credit score

Subject: Short Sale
From: DM
Date: 1/21/2009

I’m in the process of selling my home, and am likely going to sell it for less than I bought it for. Therefore, I will still owe the bank some money from my mortgage. They have offered to do a short sale of the home, in which they would absorb the difference. How will this affect my credit score?


Subject: Re: Short Sale, Fair Isaac statement, lending guidelines, points lost
To: DM
Date: 1/23/2009

See the Fair Isaac Q&A with the question, “Are the alternatives to foreclosure any better as far as my FICO score is concerned?”

For borrowing money for a house in the future, however, lending guidelines trump the credit score. For instance, Fannie Mae’s rule is outlined in its June 28 announcement: “Due to the increased incidence of preforeclosure sales, Fannie Mae is establishing a 2-year elapsed time period for reestablishing credit following completion of the action.” Fannie Mae is conducting pilot programs to test a potential new policy that quickens the preforeclosure sale (“short sale“) process.

Regarding the number of points lost, as with foreclosure (or any action), it depends on other factors. One columnist writes, “FICO spokesman Craig Watts said that the impact of a foreclosure on an individual’s score depends heavily on the payment history, length and number of credit trade lines in a consumer’s file, but ‘it is always significant.'” A big reason that there is little official information (although there are many opinions) on the true effect of a short sale is an old conundrum of credit scoring: The observer’s paradox.  The consumer’s mere knowledge that he is scored changes his behavior.