Letting Mortgage Go Delinquent To Qualify For Short Sale Damages Credit

In order to qualify for a “short sale,” in which the lender agrees for the house to be sold for less than the remaining amount owed and takes a loss, the lender sometimes requires the homeowner to be several months delinquent on their mortgage payments. But while getting out of a house you can’t afford can be a good idea, bear in mind that the delinquency will stain your credit report.

As Experian’s “Ask Max” explains,

The late mortgage payments will remain for seven years from the date they first became late. The further in the past the late payments occurred, the less impact they will have on credit scores. As the delinquencies become further in the past, your credit scores should improve, assuming you have kept all of your other payments current.

So while a short sale might keep you from losing your shorts, you will have to deal with that derogatory item riding up in your credit report for the next few years. Even still, it can be worth it. Worse than a few late payments on your credit report? A foreclosure.

Impact of allowing mortgage to go delinquent to qualify for short sale [Experian]

Comments

Edit Your Comment

  1. wrjohnston91283 says:

    I’m guessing that if you are considered a short sale then you probably aren’t too concerned about your credit score.

    • DanRydell says:

      Not necessarily. Some people have to move because of their job.

      • Loias supports harsher punishments against corporations says:

        How does that relate to a short sale?

        • LightningUsagi says:

          They move, get a new home in the new area, and can’t sell the old house. They’re then stuck with a mortgage on a house that they don’t live in anymore. This happens quite often.

        • DanRydell says:

          Really, you need further explanation?

          If you have to move because of your job, and you owe more on your house than it’s worth, what are your options?

          1. Sell it and pay the bank the difference
          2. Short sale
          3. Foreclosure

          Which is the most desirable option?

          A short sale does not mean you have no money, it often just means circumstances have made it necessary to sell your house at an undesirable time.

          • DanRydell says:

            I should add that while selling it and paying the difference is great, it’s not possible for many people. House values have dropped so much in some areas that the difference can be $100k+. Not being able to cover that does not mean they are in such dire financial straits that they “probably aren’t too concerned about [their] credit score.”

    • KyleOrton says:

      If they weren’t concerned about their credit score, they wouldn’t be hassle with a short sale and would just mail in the keys.

    • Loias supports harsher punishments against corporations says:

      This.

      If you’re doing a short sale, there are undoubtedly other issues at play that are probably more pertinent than your credit score… like having no money.

      • indeeme says:

        What would happen to lenders’ reliance on credit scores if we all just quit giving a f*ck about preserving them?

        • rjhancock says:

          The problem with that thinking is that now companies are looking at your credit report to determine hiring eligibility. Thus, even if you don’t want credit, you still need a good score.

          • DingoAndTheBaby says:

            I thought I’d read somewhere that this was illegal. I’ll have to do some research (probably should have done so before commenting, though), but I’m pretty sure that can’t be a factor in hiring someone as it has no impact on the kind of work the person will do. Additionally, credit scores can be representative of past…indiscretions…that may not necessarily be an accurate portrayal of a person’s current state of financial responsibility.

            • fatediesel says:

              There was a Consumerist article on this recently, it’s perfectly legal to look at a credit report for an applicant, as long as you give them permission.

              http://consumerist.com/2010/02/credit-checks-for-jobs-on-the-rise.html

            • AlfredaCosta says:

              Definitely not illegal. There are restrictions on what an employer can do with the information contained within a credit report, that might be what you have heard about. But for many jobs, especially those where an employee will be managing money, it’s required. And generally, for those jobs they are looking for signs of a possible temptation to embezzle. One of the companies my ex worked for discovered an employee with substantial gambling debt was embezzling. After that, credit checks for everyone in that dept.

            • Beeker26 says:

              I think there’s a new bill being pushed by a California representative that’s trying to severely limit how credit reports can be used by prospective employers. Something to the effect that it can only be done if your job involves handling money or finances in some way.

              Honestly, the Fair Credit Reporting Act of 1998 was anything but fair to consumers, and now we’re going to start seeing the aftermath. It needs to be repealed sooner rather than later. There is no good reason why anyone who is not granting you credit should be allowed to view your credit score. Period. It’s that simple.

              I also find it very troubling that one organization, Fair Isaac, has complete control and total autonomy when it comes to creating a credit score. It’s absolutely ridiculous. Honestly, it’s a game I got sick and tired of playing a long time ago, cause it’s a game you simply cannot win.

              If nothing else I think all this is going to usher in a new age of credit-less consumerism, which of course is a good thing. At least for us, that is. You’d be absolutely amazed how liberating it is to not give a shit about your credit score anymore.

            • hansolo247 says:

              Perfectly legal, and for many positions, completely necessary.

              I would never hire an accountant on my staff unless they had impeccable credit.

              It speaks volumes about personality and responsibility. It’s not the best signal for sure, but it’s the best I have.

        • DingoAndTheBaby says:

          This. I think it’s starting to happen. Of course, this is just my opinion, and it’s based on anecdotal evidence, but still. I’m of the mindset that the banks brought this on themselves, and now, as a result, the standards by which they’re going to judge people’s “worthiness” for credit will have to be likewise adjusted. And, if enough people have similar circumstances, then they’ve set a new baseline.

        • nbs2 says:

          They probably would increase their rates. After all, if they have no metric to gauge repayment (however flawed the metric may be), then there is no reason to presume anything other than a worst case scenario.

        • Red Cat Linux says:

          Isn’t that how the real estate boom turned into the real estate bust, some large banks went toes up and mortage securities became a sucking vaccum?

          Banks giving loans to people whose credit in no way qualified them for the money (essentially ignoring the credit score), followed by other banks doing the same to the degree where housing prices went nuclear (too much money chasing a limited inventory) right before everybody defaulted and it collapsed on itself?

          The problem wasn’t the credit report/score (an evil in itself) but that it was ignored in favor of turning a fast buck.

    • SenorBob says:

      A short sale goes on your credit report, too you know. And it’s a hell of a lot worse than a few lates.

  2. morehalcyondays says:

    Delinquency and a short sale are still better than a foreclosure for your credit.

    • Geekybiker says:

      Slightly. Even if you have great credit to start you’re really talking about the difference between a D and a D-. Both are terrible.

  3. KyleOrton says:

    Also, does someone know much about the seller side of the short sale? When I was researching while buying, I got the impression that after the sale the seller needs to get the bank to mark it as paid as expected or something similar, otherwise it can be considered a default similar to a foreclosure.

    The seller of the house I bought went through a whole lot over the process and I hope he wouldn’t have been better off just walking away and not looking back.

    • Putts says:

      Yes, the seller needs to agree to the terms of the short sale in order for it to actually be considered a short sale. You can’t just sell a house for less than you owe, write a check to the bank, and expect to walk away scot free. If they don’t agree to the amount of money that you sold the house for, they are able to sue you for the difference, just like they would with a foreclosure.

      But in terms of which is better, a short sale, or just walking away from the house, short sale is always better for both the borrower and the lender. The bank would much rather you try to negotiate a fair price for the house yourself, than they would to take the house from you and try to sell it themselves (usually at a much deeper discount, as they just want to get rid of the property ASAP).

      • Putts says:

        Sorry, first sentence should say “bank”, not “seller”.

      • Loias supports harsher punishments against corporations says:

        You’d think that, but I’ve already read a myriad of stories here and elsewhere where the bank would not negotiate a short sale when it was blatently obvious that if they didn’t it would go into foreclosure and they would likely make much less off the property.

        Banks are moronic, and routinely do things that damage their own pocketbook, as well as their customers’ livelihood and loyalty.

        • Tom Foolery says:

          Banks also routinely do things that they are contractually obligated to do because of their servicing agreement with the investor, even though they’d rather not. If approving a short sale is outside the investor guidelines then it doesn’t get approved, even if an approval would cost the bank less money.

        • Putts says:

          It’s true, banks don’t always approve short sales when they should. But I think that typically boils down to greed and stupidity. They think that by rejecting a short sale offer, the borrower is magically going to come up with the money that they owe on the house, but 9 times out of 10, that doesn’t happen and the house goes into foreclosure instead. Bank sells the house at a massive loss, tries to sue borrower for the difference, borrower doesn’t have any money and files bankruptcy. A smart lender will take what they can get when it’s offered to them.

  4. Putts says:

    Really? Making late payments, and then forcing a bank to eat part of the cost of a debt that you legitimately owe will hurt your credit? Who woulda thunk it?

    • Loias supports harsher punishments against corporations says:

      Way to not get the point of the article.

      • Putts says:

        Mind explaining “the point” to me, as your vastly superior intellect has apparently noticed something that my small brain has not?

    • c!tizen says:

      It seems like common sense, but when a bank buys a mortgage from a builder that built the house for $90,000 (supplies and labor) then puts it on the market for $400,000, then turns around and sells it to someone who makes $29,000 a year on a 30 year mortgage at a 6% variable interest rate with a lender (you know, the expert) telling the poor fool he can afford it… the bank has to be ready to eat some kind of a loss.

  5. YarpVark says:

    So not being able to pay because you are overextended damages your credit?

    Shocking.

    • Loias supports harsher punishments against corporations says:

      Thanks for getting me my “Shocking” square on my bingo card.

      Seriously, anyone else notice this assinine comment being used every day by someone who decided not to join the conversation?

      • YarpVark says:

        By commenting, aren’t I joining the conversation?

        The reason you’re seeing the word “shocking” so often, to reference your own commentary, is many of these posts are asinine (not assinine, btw) at best. Agreeing to pay a specific price, and then ending up in a short sale situation (for a whole host of potential reasons), ends up with the bank making less money. Of course this should damage your credit, you are not living up to your end of the bargain.

        Piss and moan about banks all you want, but people put themselves in this position.

      • Red Cat Linux says:

        I found the comment more on topic than your response. The article title is, in fact, a no brainer for people who are responsible with their credit. For others, maybe not so much.

  6. BannedInBrittan says:

    In other news; water is wet.

    Also Experian will mark a short sale ‘settled for less’ mortgage as a 9 payment pattern. FNMA will view that as a foreclosure and it will impact your ability to get a loan in the future.

  7. JenOne says:

    Your credit score spirals down out of control! But it’s worth it to keep your house. But.. ouch.

    My tale of woe:

    When my husband got laid off 2 years ago we were OK for awhile because we are good savers. We had savings enough to cover all our expenses for 6 months. We thought he’d find another job soon, but despite him sending out 100’s of resumes of a month, he could only find temp work here and there.

    Though I work, our savings account was rapidly depleting because we counted on his income too in order to pay the mortgage.

    Our lender would not even consider helping us unless we were delinquent with our payments. So we didn’t pay for 2 months, instead setting aside the money in our savings account.

    Our lender finally did help us and we got our mortgage modified. It brought down the interest rate, saving us $1000 per month. That made it so we can afford our mortgage even if he wasn’t working. We saved our house!

    But it was a very bad hit to our credit score which set off other problems. My credit score was 800+ before the two late payments showed up on the my credit report. It immediately dropped almost 100 points. Ouch. That was and remains to this day the ONLY late payments on my report and his report.

    Further, we have a small line of credit with the bank, the same lender who holds are mortgage. We got that line of credit in order to fix our roof, which was in really bad shape at the time. We hadn’t used it for anything else and even paid it back ahead of schedule while my husband was still working. When he was laid off, we paid only the minimum payment required, but never, ever paid late. The bank, without warning, reduced our available credit line to just $50 above what we owed. This made it look like we were utilizing most of our available credit and sent my FICO score even further down hill. When I called the bank to ask why they had done this, they stated that they had reduced the line of available credit due to the fact that our credit rating changed. Well duh! You wouldn’t help us unless we held back those payments!

    We have two credit cards between us, both of which are reward cards. We use them to pay almost everything and pay them off each and every month. When the FICO scored spiraled down even further thanks to the bank, our credit card companies reduced our available credit on our credit cards. Before we had $10,000 available on each card. Now one card has a $500 limit and the other has a $1000 limit. We have never paid our cards late, not even one single time.

    ..All of this from exactly two deliberately held back mortgage payments. It doesn’t take much. We have since stopped using our credit cards all together, though we had enjoyed the reward points and frequent flyer miles. We just gave up the whole rewards thing.

    My husband found work about 4 months ago and we are on track, but very poor credit to show for the whole mess. Mine is now in the very low 600’s and his is in the high 500’s. I don’t know why the difference, but there you go.

    Would I do it again? Yes, because would have had to short sale or foreclose if we hadn’t received the help. But it hurts. Now we just have to wait it out the 7 years until those two lousy missed payments fall off our reports.

    I believe that if you can show that your financial situation has changed, such as a job loss, they should not make you actually miss payments in order to receive help. It’s just insane.

  8. gparlett says:

    Well, um, yes, of course it does. The short sale itself also negatively affects your credit.

    If you somehow did not understand the very root basics of how credit works you should never have bought a house.

  9. backinpgh says:

    And in other news, the sky is blue…

    If someone doesn’t realize that not paying their bills will hurt their credit, there’s no hope for them.

  10. Randell says:

    A better plan of attack is to discuss with a lawyer a plan of action. It is not your job to help the bank, and they are not out to help YOU. Plan your getting out from under the house. The idea that a short sale is better on your credit than a foreclosure is what the credit mafia wants you to believe. That way they make YOU do the work to sell the house. I would suggest allowing the foreclosure to happen. The next step is likely a sheriff sale. Next is redemption period, Next is the eviction process. There is also the concept of cash for keys. Tell them, you will happily move if they give you some money to move. This allows them to protect their asset from you taking all appliances, or copper pipes, or anything else of value. It also is cheaper than the lawyer fees they will incur in eviction.
    If you throw a bankruptcy filing in there, they can not do anything during that time

  11. upsidedown09 says:

    DanRydell is right but it also extends to people who bought at the peak of the housing market, like myself.

    Can I afford my home? Yes
    Am I financial hardship? No
    Did I purchase my 2 bedroom condo when I got married knowing that I’d have to live there for the next 15 years just to break even? NO
    Am I going to not have children till I’m 48 years old because I’m stuck in a small house? NO

    Did we have a planned child.. Yes! And it’s fine now but we are running out of room and 10-15 years of paying down the $60K we’re negative in our condo is unrealistic for any family.

    Am I responsible for that difference… yes in one hand but in the other it was never a worry that something THIS dramatic would happen. If I knew this type of decline was possible, I wouldn’t have made the commitment. Honestly, name the people that PAY OFF their first home entirely before moving to a larger home! No one! You built equity then moved.

    Therefore there are other reasons that don’t pertain to financial hardship and this is the grey area that I’m stuck in.

  12. Shawn says:

    Who in the hell didn’t know this? Really is this how dumb consumers in America are? No wondering people took bad loans. The don’t understand basic credit issues….Wow

    • DimTwinkle says:

      We moved to a very poor county from the big city. The joys of telecommuting allow us to live out of the city in a beautiful home.

      Unfortunately, after a number of years here, we are looking at moving. Most of the people in this area were born and raised here and have no desire to leave their lifestyle behind. Their lifestyle is one of living not paycheck to paycheck but job to job. For the most part, residents have no interest in the state or country they live in, much less the world. I am continually appalled at how even the brightest people here have blinders on to the rest of the world.

      So, yes, there are many people who take whatever they are told by the “experts” at face value. If the banker or broker tells them that they can afford a mortgage, they accept it – no questions asked. Often they know the banker from church or bingo night or the local bars and, as a result, small town bankers will often accommodate them.

      Imagine, though, what happens to these people when they leave the backwoods world they live in and move to a modern location. They are prey for all kinds of scammers and shysters. No doubt this is why a great many young people who go off into the military or college end up returning to this same, poor, backwards community.

      Then there are the poor people who live in urban areas. One woman in the Minneapolis/St. Paul area (if I remember correctly) had no job, no reliable income. Some con artists managed to get her on the hook for something like 12-14 properties and she, of course, had absolutely no understanding of what was going on. She was promised that it was safe and legal and that she would make a lot of money. The con made lots of money and she was left worse than she started since she couldn’t even afford bankruptcy.

  13. Shawn says:

    Who in the hell didn’t know this? Really is this how dumb consumers in America are? No wondering people took bad loans. They don’t understand basic credit issues….Wow

  14. LRM216 says:

    And many who knew the rules of owning a home and paying a mortgage – lived happily ever after in good credit heaven until their freaking lives fell apart by the loss of their jobs, insurance, etc. Unless you are very wealthy, you can’t live forever and pay house, household bills, medical and food forever by using your “savings” without having a job. There will be more people than ever before in history with “lousy” credit – due to the lousy politicians we have had running (past and present) this country. What has happened to all Americans is a tragedy and we will ALL pay for it – one way or the other.

    • YarpVark says:

      Which is why you should have enough if your situation is temporary (ie: job), or if its more permanent or long term, you sell BEFORE it becomes such a massive problem. If you sell for less than you bought it for, tough. Real estate is like every other investment, it has its own risks.

  15. jim says:

    yes, make someone else pay for your screwups, the new american way.

    • samandiriel says:

      It’s been the way of corporate America for several decades, now. Corporate socialism but personal capitalism stinks.

  16. samandiriel says:

    I short sold my home in Phoenix, AZ ( a no-recourse state). Bank of America was actually deliberately obstructive during the process – it would have sold for $120,000 if they hadn’t dragged their feet for three months until the buyer threw up his hands and went with another home.

    Second buyer went the same way.

    Finally sold for $52,000 to the third buyer, and it only went thru because both realtors called up everyone they could at Bank of America every day for two months until finally some regional manager took things in hand and rammed it thru on the very last day before foreclosure (no more extensions). I was very lucky.

    As for it hurting my credit rating, it is 6 months later and my credit score is 717 and two of my credit cards just raised my limits. I can’t buy a house for 2-5years now (depending on how I went about it), but methinks it’s not the horrible life-ruining event that seems to be the popular view.

    • hansolo247 says:

      I know. credit scores are messed up.

      A 60 day late credit card payment will torpedo your score. A short sale (where the lender lost BIG) and it’s a blemish at best.

  17. menty666 says:

    I just want to throw it out there, but given banks don’t want to lend these days anyway, are cutting your credit card access levels messing up your credit, and given the shear number of people with bad credit scores overall…..

    Is it really that big of a deal anymore?

    I’m not going to say it’s a good thing to have a bad credit score or that it should be something to strive to. Nor should anyone intentionally be fiscally irresponsible.

    But is a poor credit score still the intimidating threat it used to be?

    Banks, car dealerships, even the credit card companies themselves are adjusting to the new normal, the lower bar.

    So while yes, it might make your life a little harder, you’re certainly not the social pariah you once were if your number’s less than stellar.

  18. duffbeer703 says:

    Whisky, tango, foxtrot?

    You’re not paying your mortgage so the bank will write off a portion of your loan. Of course that should damage your credit — it should devastate your credit. Would you loan money to someone who wasn’t paying their mortgage? I wouldn’t for any non-trivial amount of money for many years.

  19. pot_roast says:

    I think there are a lot of people that are so sick of the FICO scam that they just don’t care anymore. They’re just worried about having a job and a roof over their head.