I am asked this question all the time. While I can’t universally answer the question, the best approach is to educate yourself on the impact of a short sale to properly avoid any preventable consequence.
Allow me to explain.
A short sale is a negative credit event and has an immediate negative impact on an individual’s credit score. This is true whether a homeowner continues to make payments on their mortgage prior to the short sale or stop making their payments prior to the short sale. The credit score is a real-time reflection of circumstances and can fluctuate dramatically at any moment based on a variety of short-term factors and variables (positive and negative credit events).
An individual’s credit history is a historical collection of data about behavior over measured periods of time, both short-term and long-term. It provides insight into the predictable nature of an individual’s future actions based on past performance. Reviewers of credit history data use this information to determine whether they can expect the individual to act in accordance with their past performance.
In summary, a credit score is a reading from a moment in time while a credit history is a predictor of behavior.
Eligibility for a security clearance or government contracting position is dependent on a review of an individual’s credit history. The level of trust determined for the security clearance or government contract determines the thoroughness and extensiveness of the review. A credit report is just one of many resources considered as part of the normal inquiry process to a security clearance. The value of a credit report when applying for a security clearance is that it includes the credit history which provides insight into an individual’s past performance, choices, judgment and behavior over measured periods of time. It allows a reviewer to predict whether an individual would be vulnerable or susceptible to outside influences (such as bribery or extortion).
Therefore, credit scores based on recent negative events such as a short sale, should not influence or impact an individual’s eligibility for a security clearance or government contract when that negative credit event was not caused by the individual and is contrary to the patterned behavior reflected in that individual’s credit history. At worst, it may cause a reviewer to make an inquiry to gain more insight into the circumstances surrounding the negative credit event. The negative credit event must be the exception and not the rule for the individual and the overall credit history must demonstrate favorable behavior.
Also, short sales are generally viewed more favorably than a foreclosure or bankruptcy because the individual made a pro-active attempt to assist the lender and limit their losses. A foreclosure or bankruptcy, while sometimes unavoidable, often implies that an individual gave up, or quit, on their obligation. The distinction is important when using past performance to indicate future behavior.
A short sale will result in a lower credit score which may trigger an inquiry from a reviewer. Here is an example of a reasonable response to such an inquiry. The phrasing is generalized and should be adjusted based on facts and circumstances and whether the event has already happened or has yet to happen.
To Whom It May Concern:I’m writing to address a recent event which may affect my short term credit score. On October 28, 2009, I sold my property located at 123 Main Street, Anytown, VA, 12345. Due to a significant decline in home values I owed more money to my mortgage lender(s) than my home was worth which required me to do a short sale. A short sale means that my lender(s) agreed to accept less money than they were owed in order to release their lien on the property. They agreed with me that the current value of the property was significantly less today than when they approved my mortgage in 2005. They also agreed that my personal hardship (see attached letter) sufficiently explained why I had to sell the home now and was not able to pay the balance of my mortgage(s) after the proceeds from the sale of the home.
Unfortunately, it was necessary for me to stop paying my mortgage in order to qualify for the short sale approval. As a consequence, my lender(s) had to report me to the credit bureaus for being late on mortgage payments and not paying as originally agreed. These negative reports, while true, have temporarily lowered my credit score.
I’m aware that my credit history is a consideration in approving/maintaining my security clearance. Please understand that my current credit is not in keeping with my overall credit history which reflects excellent performance, choices, judgment and behavior.
My credit is very important to me, as is my current job/position and my security clearance. While I accept the credit consequence of my recent short sale, I also understand that I was not the cause of the circumstances creating the short sale. My credit score will improve quickly but my credit history remains the best indicator of my (continued) eligibility for my security clearance.
I ask that you consider this explanation in your review process and (look favorably on my application for a security clearance or government contract) or (do not revoke my current security clearance or government contract) for all the reasons set forth in this letter. Thank you for your time and consideration. I am happy to provide any additional information upon your request and look forward to your favorable response.
There is a saying that it’s sometimes better to ask for forgiveness than permission. That rule does not apply to this example. Protecting a security clearance is too important and I always recommend seeking the prior consent and approval of a supervisor or authority when considering a short sale. I realize that the short sale will continue even without prior approval but it’s much better to know what lies ahead. I have helped dozens of individuals with this very concern and not one has lost their security clearance when using this approach.
Please feel free to share this information with clients, customers and interested parties. As always, I am available to provide any assistance when helping our Neighbors in Need. Contributed by Jerry Boutcher, with Keith Barrett, PLLC