How Will a Short Sale Affect My Credit If I Am Not Behind on the Payments?

Short sales are a relatively popular way to avoid foreclosure. Not only does this tactic save the debtor money on getting rid of his mortgage, it is much better for a credit score. Even if a bank agrees to a short sale when you are current, however, having the item on your credit report causes damage.

Identification

The short sale will affect your credit even if you have never missed a payment, because the creditor will more than likely report the account as in "redemptive" status to the credit bureaus. A short sale brings a score down by 85 to 160 points. Short sales are usually on the lower end of this spectrum, while a foreclosure will probably cause harm closer to 160 points. Therefore, a short sale is usually the better choice.

Benefits

The fact that you have never missed a payment is even better for your credit score. Having several payments 30, 60 or 90-days late leading up to the short sale hurts your score for years to come. Also, if you have a clean record, you can probably find another mortgage again rather soon. The typical borrower that goes with a short sale gets another home within two years, according to ABC 15 Arizona.

Considerations

Lenders rarely approve a short sale if you are current on your payments, because short sales are generally only approved when it appears the borrower might have to go into foreclosure, according to Bills.com. This arises from the perception that if you can afford your payments right now, there is no need for the bank to risk a loss with a short sale. If you did have a perfect payment history, you would need to prove some sort of hardship.

Warning

Most states, except for a few like California, allow creditors to go after any balance left over from a short sale. If you cannot pay this deficient balance your credit score could see another big drop from the account going to collections or the bank getting a judgment. Lenders, however, often do not pursue deficient balances even in states that allow it. You should talk to the mortgage provider to determine how the company will handle this scenario.