Selling a house short means that an individual has worked out an agreement with the lender wherein the lender is willing to accept less than the current balance on the mortgage, provided that the current homeowner can find a viable buyer within an acceptable period of time. Short sales have become a popular alternative to foreclosures in many markets around the country because the long term ramifications on credit are not as detrimental as a foreclosure filing and judgment would be. However, should a short sale be unsuccessful, the lender still has the option to foreclose.
In a typical short sale scenario, a homeowner must be very clear and have in writing a statement from the lender detailing how he will report the short sale once the transaction is complete. The most favorable filing is one that reads “Paid” -- however, unless there is only a small amount of debt to forgive, most lenders will report the short sale as “Settled” on a credit report. A “Settled” account is equivalent to a 30 – 60 day late payment in most cases, and can put the homeowner in a position to purchase a new home in as little as two years. However, if a bank lists the short sale as “Closed but not paid in full,” this could have dramatically devastating credit repercussions for as long as seven years, or as many as ten.
While a short sale will have negative effects on credit history, it is important to remember that a foreclosure will be attached to a consumer’s credit report for as long as ten years. The same is true of a deficiency judgment should the lender not be able to recover what is owed on the mortgage from the home owner at a foreclosure sale. It might not be the most attractive option for credit; however, a short sale is an option that allows a homeowner to recover her financial health much faster than the alternatives.