How do short sales affect a FICO® Score?

There appears to be quite a bit of confusion with consumers and mortgage professionals about how FICO® Scores consider and treat the reporting of a mortgage related short sale.  In fact, I have seen and heard it be claimed that a short sale is not considered negative by the FICO Score.

Simply not true.

To set the record straight, the reporting of a short sale (as outlined by the CDIA reporting guidelines) would be considered negative by the FICO® Score.  The exact impact of the reporting of a short sale on a credit score depends on a number of factors:

• Whether or not the servicer reports the agreement to the short sale to the credit reporting agency.
• What information is reported regarding the short sale.
• The overall composition of the consumer’s credit report.

Generally speaking:

• The impact on score will not be as noticeable for consumers whose credit files already included missed payments/carry heavy debt loads.
• Conversely, the downward impact on score will probably be more noticeable on consumer files with no other delinquency/derogatory items and relatively low debt levels.

In short, the short sale matters.