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A short sale is when you sell your home for less than the amount you currently owe on your mortgage. It’s essentially a type of debt settlement agreement that you make with your lender.
When you first took out your mortgage, your lender placed a property lien on your home, giving them the right to sell the property if you defaulted on your loan. With a short sale, your lender agrees to lift the lien so that you can sell the home yourself to repay a portion of the loan.
Although you won’t see the words “short sale” on your credit report, it will be updated to show that you didn’t repay your mortgage as agreed. The updated account will be considered a derogatory mark and will hurt your credit score.
How long does a short sale stay on your credit?
A short sale can stay on your credit report for up to 7 years, the same as most negative marks, such as foreclosures, repossessions, charge-offs, and bankruptcies (although these can sometimes remain for 10 years).
If you made any late payments on your mortgage before you made the sale, then the 7-year period will start from the date of your first missed payment.
Once your credit report is updated with the information about your short sale, your credit scores will also update accordingly. The short sale may hurt your credit score as long as it remains on your report, but the effect will diminish over time.
How does a short sale show up on your credit report?
A short sale won’t be listed as a “short sale” on your credit report. Instead, it’ll show up as an update to the status of your mortgage account.
After a short sale, instead of “debt paid”, your mortgage loan account will probably have one of the following labels: 1 2
- Settled
- Account legally paid in full for less than the full balance
- Not paid as agreed
How does a short sale affect your credit?
A short sale will hurt your credit because it indicates that you didn’t fully repay your mortgage.
The exact impact it will have depends on the following factors:
- Your overall credit history: If you have a good credit score, a short sale will cause a larger drop in your credit than if you have a bad credit score.
- The scoring model used: FICO and VantageScore are the companies that produce the main credit scoring models. Although these models have many similarities, they may have small differences in how they weight credit items related to a short sale.
- Other information on your credit report: The number of negative items on your credit report related to the short sale will affect its impact on your credit. For example, the effect will be greater if you had any late payments leading up to the short sale. 1
Credit impact of a deficiency balance
When you have a short sale, the amount that you get isn’t enough to cover your whole mortgage balance. The amount left over on your loan that you still owe your lender is known as the deficiency balance.
If you aren’t able to pay off the deficiency balance and your creditor reports it to the credit bureaus, the short sale will hurt your credit score more than if you were able to pay off the whole loan. 1
Credit impact of a short sale vs. foreclosure
Short sales can be just as harmful as foreclosures when it comes to your credit because both appear on your credit report as loans that weren’t paid as agreed. 2 However, in some cases, short sales can have a less negative impact on your credit score.
Because foreclosures are always preceded by late payments, short sales may be less harmful to your credit if you made a short sale before you missed any payments.
What’s more, FICO revealed that although a short sale has the same effect on your credit score as a foreclosure if there’s a deficiency balance after the sale, short sales without a deficiency balance are significantly less harmful to your credit score. 3
Can I buy a house with a short sale on my credit?
Yes, you can still get a mortgage and buy a house after a short sale, although not right away.
Below are different types of home loans you can consider and how long you’ll need to wait before applying if you had a short sale or a foreclosure: 4 5 6 7
Waiting period after a short sale or foreclosure
| Loan type | Short sale | Foreclosure |
|---|---|---|
| Conventional mortgage | 4 years | 7 years |
| VA | no required waiting period from most lenders | 2 years |
| FHA | 3 years | 3 years |
| USDA | 3 years | 3 years |
Note that the short sale’s negative effects on your credit score may last into the period when you can technically get a new loan, which will affect the quality of the mortgages you’ll be eligible for.
To qualify for good interest rates and loan programs, you might want to work on fixing your credit before you apply for another mortgage.
How to avoid another short sale on your next loan
With your next loan, avoid a short sale or a foreclosure by negotiating with your loan servicer if you start having trouble making your mortgage payments. Ask your lender about loan modifications, refinancing options, or forbearance agreements to help you keep your home during financial hardship.
Can a short sale be removed from your credit report?
It’s sometimes possible to remove a short sale from your credit report, although it’s not very likely unless it’s an error that was added to your report by mistake.
In general, here are the approaches that you can take to get a short sale off your credit report:
- File a credit dispute
- Negotiate pay for delete
- Ask for a goodwill deletion
Dispute a short sale on your credit report
If the short sale on your credit report is an outright mistake—which can happen if your lender or one of the credit bureaus confused you with someone else—you can try to remove it from your credit report by sending a credit dispute letter to your lender and the bureaus.
This strategy has the highest chance of success, but only if the short sale really is an error.
Negotiate pay for delete
As mentioned, when you have a short sale, you’ll initially still owe a deficiency balance—the amount of the loan that the sale didn’t cover.
It’s sometimes possible to offer to pay that balance in return for having your lender remove the short sale from your credit report. You can open these negotiations by sending something known as a pay for delete letter to your creditor.
Ask for a goodwill deletion
If you’ve already paid the deficiency balance, you don’t have the leverage needed to negotiate pay for delete. However, as a last-ditch attempt, you can send a goodwill letter template asking your mortgage lender to empathize with your situation and remove the short sale from your report as an act of goodwill. This is more likely to succeed if you have a good reason for falling behind on your mortgage payments, such as an emergency that left you with unexpected medical debt.
How to rebuild your credit after a short sale
With careful planning and credit monitoring, your credit score can recover after a short sale. However, it will take a while.
While you wait for the relevant items to fall off your credit report, take the following steps to rebuild your credit and develop good, long-term habits:
- Review your credit reports regularly: It’s important to monitor your credit reports to ensure that they’re accurate and up to date. You can request free digital copies of your reports from each of the major credit bureaus (Equifax, Experian, and TransUnion) one per year from AnnualCreditReport.com.
- Pay your bills on time: Paying all your bills on time adds positive information to your credit report, which gradually improves your credit score.
- Pay down your debts: If you have any other debts, focus on paying them off. This will improve your credit utilization rate, benefitting your score. It will also reduce the amount of interest you accrue over time, making it easier to stay on top of future payments.
- Only apply for new credit accounts when you need them: Applying for new credit can hurt your credit score, so avoid opening accounts that you don’t need or that you can’t afford to have.
- Keep your old credit cards open: Two major factors that contribute to your credit score are the length of your credit history and your credit utilization rate. Keeping old accounts open benefits both of these factors, helping you build credit over time.
