Short Sale vs. Foreclosure Credit Damage

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Short Sale vs. Foreclosure

Basics of a Short Sale:

Short Sales happen when a lender agrees to accept

less than the amount owed against the home because

there is not enough equity to sell and pay all costs of

sale. Not all lenders will negotiate a Short Sale, and

that is why a Real Estate agent can be a tremendous

help by contacting the lender’s loss mitigation

department to find out.

You can’t just wake up one morning and decide you’re

going to sell your home at a loss by asking for a Short

Sale. Typically, lenders won’t even consider a Short

Sale if your payments are current. Lenders will be

more agreeable to negotiation if your payments are in

arrears. Plus, if you have cash assets, the lender might

try to tap those accounts. Doing a Short Sale is not for

the faint of heart.

How is the Seller’s Credit Affected?

According to Christopher Rockey, Director of Education

for Mortgage Resolution Services, sellers will take a

bigger hit on their credit report by going through

foreclosure or giving the lender a deed-in-lieu of

foreclosure. Rockey says the points lost on a FICO score

(the formula used to assess a borrower’s risk factor)

are as follows:

•

Both of these solutions affect credit the same.

Sellers will take a hit of 250 to 280 points. This

means if a seller’s FICO score before foreclosure is

680, it could dip as low as 400.

•

The affect of a short sale on a seller’s credit report

is much less damaging. The ding on credit will show

up as a pre-foreclosure in redemption status,

Rockey says, which will result in a loss of 80 to 100

points. This means a Short Sale with a previous

FICO of 680 will see it fall to 480 to 600.

•

Borrowers must realize these numbers are only

theory. They must continue to be responsible with

their other consumer debt. Often if the hardship is

financially related, borrowers fall behind on other

consumer responsibilities.

Waiting Period Before Buying Another Home

•

Recently Rockey said, Fannie Mae and Freddie

Mac have changed their guidelines. Foreclosure is a

minimum of 5 years with a FICO score of 680 and

10% down. A Deed-In-Lieu is 4 years, 680 FICO,

and 10% down.

•

2 years, no minimum credit score and no minimum

down payment. These numbers are extremely

important to consider.

Short Sale/Foreclosure Deficiency Judgments

The bad news is a seller could be subject to a

deficiency judgment for the difference between the

loan amount and the amount paid. In Arizona, purchase

money loans are not subject to deficiency judgments;

however, hard money loans, home equity loans and

refinances are. Exception: refinances can be antideficiency

if paying off purchase money loans.

The lender has sole discretion whether to pursue a

deficiency judgment in those instances when the

judgment is permitted. To determine whether a

pending Foreclosure or Short Sale is subject to a

deficiency judgment, clarify the issue with the lender or

talk to a real estate lawyer.

For sellers trying to decide whether to let a home go

through foreclosure versus attempting a Short Sale,

salvaging their credit is the main advantage to doing a

Short Sale. Be sure to seek legal and tax advice

before making this decision.

Article obtained from www.about.com and authorized

by Elizabeth Weintraub who has an extensive

background in real estate spanning more than 30

years.