Effect of short sale and mortgage modification on credit scores

Dear Experian,

I am going through a short sale on my home and the lender is saying that if I take out a promissory note to make up for some of their loss that they will report my short sale as “paid in full -not full amount” Is that better than just a short sale, or because of the “not full amount” will my credit be dinged just as much as if I did nothing and they just listed it as a short sale?



Dear ATH,

The operative words are “not full amount.” That indicates you didn’t repay the mortgage in full, and as originally agreed. This likely will be viewed negatively by lenders. The payment history of the mortgage will also remain. If you have missed payments, it is probably already having a serious impact on your credit worthiness.

The term “short sell” doesn’t actually appear on a credit report. It is simply the phrase used to describe negotiating with your lender to sell the house for less than is owed on the mortgage and for the lender to then consider the mortgage closed.

As a result of such an agreement, the account status may be reported as paid, but in your case, will likely also indicate that the lender did not receive the full amount owed. In effect, that means the debt has been settled for less than actually owed.

If you are already severely delinquent on the mortgage payments, your creditworthiness is probably already badly hurt, and that would be reflected in poor credit scores. Because your credit scores are probably already poor, the way the status line of the account is shown is unlikely to make a significant difference.

The important thing now is that the short sell process can help you get out from under the debt. Once the mortgage debt is resolved with your lender, you can begin to rehabilitate your creditworthiness over time by paying all of your other debts as agreed.

Depending on your circumstances, mortgage loan modification under the Federal Government’s Making Home Affordable program may be an alternative to a short sale. Under a mortgage loan modification program your lender changes the terms of your loan to allow lower payments, enabling you to remain in the home.

The loan modification begins with a three-month trial period. If the payments are made on time throughout the trial period, the modification can be made effective. If the mortgage payments were all current before the trial period, they will continue to be reported as current. If there were delinquencies prior to the modification program, the history will continue to reflect those late payments.

Once the trial period is completed, the loan will be reported as modified.

It is still not clear how loan modification programs will impact credit scores. There simply has not been enough time to document the payment performance of those going through the modification process to determine if changes need to be made to credit scoring models.

Reestablishing a history of strong credit management with on-time payments is the only way to really restore your creditworthiness and subsequently good credit scores.

Thanks for asking.

- The “Ask Experian” team

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