A short sale, or a pre-foreclosure sale of property, is when a property owner sells his or her home for an amount that is less than the balance currently remaining due on the mortgage. If the lender approves a short sale of the property, the home can be sold and the proceeds can be used to pay off all or a portion of the mortgage balance. It is essential to note that, unlike a normal house sale, the bank must approve the price before the homeowner can complete the property sale. This is because the lender will lose a potentially large sum of cash, though typically not as much as would be lost in a foreclosure.
The short sale does allow you to avoid a foreclosure but there is no way to sidestep the damage it will do to your credit score. A short sale can chop your credit score by 140 – 160 points, and is a derogatory item that will remain a part of your credit history for seven years. The loan paid by the proceeds of the short sale may be reported to the three major credit bureaus as a settlement, a deed-in-lieu of foreclosure or “settled for less than the full amount on the loan.”
If the short sale situation is ideal for you, the lender will make the decision to forgive all of the deficiency after the property sale is complete. There are some short sale agreements that do not address remaining balances or they are written to keep you on the hook for the remainder due. Then there are short sale situations in which the bank has included language like “has agreed to accept a short payoff” or “waive their right to pursue collection,” but the bank continues to impact your credit by reporting the mortgage debt and still owing to the three major credit bureaus. It is important to note that a lender is not allowed to give false credit information about you to any party, including credit bureaus. Their action keeps your credit score low for a longer period of time and limits your opportunity to improve your financial situation.
If the language included in your short sale settlement approval letter leads you to believe you do not owe anything else toward the mortgage deficiency, you have the right to pursue legal action. Now is the time to act to protect your credit for the future!