How Short Sales Will Affect Your Credit

By Mike Wayman


The short sale of a home or property usually occurs when the owner either owes more in loans than the property is worth, or the property value falls drastically for some reason, causing the owner to sell the property before it becomes further devalued. Either way, a short sale can affect the owner’s credit.

First, if the short sale is due to foreclosure and the property is sold for less than the loans owed on it, the owner will be responsible for the difference. If they cannot pay the difference, the bank can then sue for the difference, resulting in a judgment against the former owner and thus a negative credit rating will result. However, if the bank chooses not to sue, but instead takes the loss as a tax write-off, then the former owner owes nothing further and is not sanctioned in any way, thus there is no negative reflection on their credit report resulting from the short sale.

Sometimes a property owner will sell the property and take out a new, smaller loan to pay the difference of what is still owed after the short sale, which can actually help their credit rating by showing no negative report due to foreclosure and also the securing of a new loan with timely payments being made. In a roundabout way, this can boost credit scores by showing the activity of a new loan being paid correctly, which is always a benefit to one’s credit rating.