If I'm planning to do a short sale but have not yet gone behind on monthly payments, is there any advantage to not going behind on payments? In other words, does your credit get damaged exponentially in that scenario? If it doesn't really matter, then wouldn't it be wiser to just stop payments now and save the money?
Payment history is the most important factor in credit scores. Allowing your mortgage payments to become delinquent (go behind) will have an immediate, severe impact on your credit scores. If you were entering a mortgage modification program and never missed a payment, then your scores would not be negatively impacted at all.
However, some lenders may require that your mortgage be delinquent before they will enter into a loan modification or a short sale agreement with you.
The term "short sale" is used to describe negotiating the sale of the house for less than you owe on the mortgage. The lender is agreeing to a settlement amount for the mortgage. After a short sale the mortgage account will usually be reported as "settled for less than full balance."
Any account reported as settled will damage your credit scores. A settled mortgage will have an even greater impact than other types of settled debts. On average, a VantageScore will drop between 120 and 130 points after a short sale. By comparison, a foreclosure drops the Vantage score on average between 130 and 140 points.
Before going forward with a short sale speak with your lender about its requirements and how the account will be reported. If it will not be reported in a negative status, you definitely don't want to miss payments. If it will be reported negatively, then by making payments you may be able to reduce or delay the impact.
Thanks for asking.
The "Ask Experian" team