As many wonder how long the effects of a housing bubble will be felt in the American economy, the losses from years' gone by are still affecting the credit market. Credit bureaus are still struggling to quantify the effect of short sales on consumers' personal finances..
A short sale is the sale of a home at a price below the amount of debt outstanding on a mortgage. To clear their balance sheets, banks are allowing homeowners to sell their homes at a loss to recoup some – or ideally all of – the remaining balance due on their mortgage. The process is slow, costly, and it greatly affects a person’s ability to borrow in the future.
Those who participate in short sales often see their credit scores fall by 150 points. FICO-based models suggest that when a person engages in a short sale to remove their existing mortgage debts, the next step is often a complete lack of payments on other types of credit. In short, those who sell their home in a short sale are far more likely to stop paying on their credit cards. Naturally, credit card companies are often unwilling to open new accounts for people with recent short sales on their credit reports.
Credit bureaus found that in 2007-2009, short sellers were 55% likely to stop paying on other credit accounts. This gives the industry pause about lending to people with a history of exiting their mortgage with a short sale, even if their payment history on their credit cards is stellar.
FICO credit scoring systems are unlikely to change the way they record short sales. For those eager to get out of their underwater home, there is often no other option than to sell a home short. However, the repercussions, as the industry has seen, can have a seriously large adverse affect on a person’s ability to access credit for years after the transaction.