Artur,

It has about a 150 point negative impact vs. foreclosure which has a 250 point negative impact.  I am not sure how it is going to affect the new chages to the credit industy

Thank you very much David.  Does it depend on the amount or it always shows?

Artur,

I just heard a report on National Public Radio Radio (NPR) that there are serious tax implications that could arise from a short sale. Specifically that the forgiven debt amount is in fact taxable as income. Ouch!

Cheers,

David Swierczynski

I have found that both the short sale and the foreclosure will affect the credit scores.  However, it's not so much the short sale process as the fact that most of these buyers were behind on their payments when they got to that point.  Therefore even if they sold their home for enough to cover the loan without requesting a short sale, the resulting credit score is the same.

I have also noticed that even though both will have an affect on their score. The short sale will not only have less of an impact, but it will clear off alot quicker. Thus allowing their score to climb back up to the point of being able to purchase sooner than if they went through foreclosure. 

I'm not sure what impact the new process will have. I am looking forward to seeing the results.

David - thank you for the comment. The tax implications are quite clear.  I am just trying to determine the FICO score impact.

Scott, Barbara and Kim - my client doesn't have a single late payment. He has a single loan as he refinanced exactly a year ago.  However, today's market value is equal to 95% of the loan amount.  If you add cost of sale he might have to pay out of the pocket 15% over the sales price. He realizes the tax implications.  However, he wants to avoid the drop in the FICO score. According to David from Boca Raton, the drop in score is unavoidable independent on the fact tah my client does't have late payments. Is that right David?

Clifford, thank you very much for sharing your experience with us.  Ask your question in Q&A (you can find in the middle of the Nav Bar at the top of the page.  I am sure that you will get and advice you are looking for. Good luck.

Artur

Since you're up in Northern California, is it safe to say the home is in the $700K range (median?).

I can tell you of a scenario where I counseled a client going through a divorce, where he had to take a short sale, was $75K deficient, and it did NOT reflect on his 780 credit score, as he made arrangements to pay the deficiency at a cost of $149 per month until it was paid off. The lender agreed to waive all the interest as they did this interest free, and it is merely an unsecured loan on his credit report. I can give you several scenarios of creative avoidance that I've structured as long as the client is willing to participate as the cost of their credit will save them a huge chunk of money over the long haul.

Im in NYC on business but you can send me an email, or call me after Wednesday when I return to California, and I'll be happy to discuss further with you.

Hi Bill, thanks. This is exactly what I am looking for. The client deficit might be between $30k and $80k and he wants to avoid short sale.  So we are looking to a short term loan option. I'll send you an email with details of the client scenario later today.

Artur, the credit score will not depend on an amount, but obtaining a new loan down the line the bank will look at the deficit. 

David, I understand. My client definitely will try to avoid a short sale. I am investigating other options with his lender. Will let you know results. Thank you for your comment.

I just completed a short sale last week.  Although its not an ideal situation, I feel better than having a foreclosure on my record.  Not too sure how it will affect my credit yet, I had a 720, but I've read that this will affect my score less than a foreclosure and I will be able to recover quicker.  Regarding the taxes, check out this website.  http://www.letstalkrealestate.com/ltretelevision.htm .  Not sure if it is legit, I am planning to check with my accountant.  I just found this today.   According to this accountant, there is a legal way to mitigate the 1099 buy showing insolvency.  Hope this helps and good luck to all.

I have a client who went through a short sale and received a 1099 for the difference.  She even had PMI but the company was only willing to pay half of the deficit, leaving her with "income" which she had to claim on her taxes.  Be very careful about a short sale and make sure you understand ALL of the implications that go along with it.

Jsut read in USA Today on Friday that new legislation was passed in which shortsales will not be taxed as income.

Thank you M. Jones for sharing this information with us.

Tamara, thank you for sharing this with us.

David - can you point me to the article in USA Today, please? What is its title? Thanks.

I mispoke - the article said that the legislation would be proposed.  Link to full article and excerpt below.

Federal Housing Adminstration to help refi at-risk loans

http://www.usatoday.com/money/economy/housing/2007-08-30-fha-subprime_N.htm

"In another bold step, Bush will propose a temporary change in tax law. It would let homeowners avoid taxes on forgiven debt if a lender agrees to alter the terms of a loan."

David,

thank you very much. 

Has anyone been successful in negotiating with the bank to report a short sale as "paid as agreed" or "paid" and nothing more.  I have seen some hint of this, but I'm not sure if that is the case.  I would be willing to owe the bank some money if I can avoid the credit impact, but there's no way I'm going to be willing to owe the whole amount.

I did credit reporting at a very large bank for many years.  I also worked in the legal department and delt with filing deficiency liens and satisfactions of liens.  I can tell you for a fact that you can't bargain with the bank on how to report things to credit.  All financial institutions are bound by FCRA, and must report accurate information. 

Why would they report as "paid as agreed" if you're actually "settling for less than full balance"??

Sometimes the only leverage banks have is negative credit reporting, they have no reason to give that up, and legally they can't misrepresent what happens on an account.

Be prepared for the deficiency judgment.   Most likely, that will keep you from buying a house again until it's paid in full or you settle with the bank (again).

I've seen a lot of 2nd lien balances forgiven, but very rarely on first liens.  99% of the time, the bank is going to file the judgment.  Why wouldn't they?  It's income to them.  If you bet a judgment against you, you'll be paying the maximum amount of interest allowed by state law.  Most liens I filed were at 18%  compounding interest. 

In the event that you try to settle a deficiency judgment, they will typically only waive some of the interest, not the principal.

I guess I can't understand how or why someone could possibly expect to walk away with something positive after not meeting a financial obligation.

Nathan, please look to the comment #8 by Bill Nazur. He reports a success in negotiating an alternative to short sale not effecting the credit rating. As a result, I requested Bill to help me find a solution for my client.  He wants to sell, but short sale due its impact on credit score is unacceptable to him.  He is capable to repay a possible short term loan in a year, max. two years. Thanks for using this post to ask your question.

Davis, you are right - if its a short sale - a lender doesn't have much of a choice.  Short sale means that Seller defaulted on a part of the loan. If alternative payment is negotiation - there is no default - so there is no reason for reporting it to credit agencies.  Thank you for comment.  I really appreciate it.

Checked out that link.  Good info, but the summary was basically "If you're doing a short sale, you might as well file bankruptcy, too, then you can avoid the tax liabilities."

Often, shortsales and bankruptcies go hand in hand.  If someone is going into foreclosure, chances are they have a lot of other bills not being paid other than the mortgage payment.

In my experience, the mortgage payment is always the last possible payment to be paid late. 

Thank you David for your feedback. It is not the case with my client. He simply wants to sell the house as it became a burden. He is looking for an alternative to short sale, e.g. a conversion of the amount he might be short at closing to a one year loan. He has means of paying off the difference with a year.

Hi, I'm a homeowner and my husband and I recently enjoyed a large amount of appreciation on our 1 bedroom condo a few years back. We refianced and took out some of the equity so we could start investing and saving for our future. We were advised to invest in real estate and did so in one of the "hottest" markets around (at the time) Vegas, NV. We stupidly agreed to a loan that was different than what we were promised. We were subsidizing this rental with a renter in it until she was evicted by our managment company. After floating the entire mortgage payment for a few months we relized we would exhaust the funds we had set aside to maintain the property alot more quickly than we had planned. We began exploring a short sale with the help of a real estate agent and a professional negotiator. After a 8 month process we have had 5 serious offers which the lender allowed to walk away by dragging their feet and to top all of that off they recently lost our file. We have started the process over again. We are hoping (for their sakes)that they will finally get their act together and re-coup most of what we owe them. 

Hi Young Investors,

Thank you very much for sharing your story with us. I am really sorry about your situation. 

 I am not sure if you are right regarding your statement deficiency judgment that lender. Per William Markham, Attorney in San Diego, "a lender cannot obtain a deficiency judgment if the underlying debt arises from "purchase-price loan," which is either a "seller carry-back loan" (see above) or a third-party purchase price loan for a owner-occupied residential property that has no more than four units (see above). You mentioned that you refinanced your residence, so the law will not apply to you as you don't hold the original "purchase price loan".  I am not a lawyer - but it is my understandings (anyone else - please comment).  Therefore I would be very careful in trying to do "two short" sales" in parallel - until you have a complete clarity that deficiency judgment is not a consideration.  Additionally, if one lender agrees for a short sale it doesn't mean that the second one will agree as well. As a matter of fact I find it very unlikely.  Therefore, you might find yourself in a situation that you will be forced to file for bankruptcy protection.

Great Information on short sales, thanks everybody.

Thank you John for dropping in.  I have to say that this particular post is working far beyond my expectations.

THANK YOU EVERYONE for your contributions! 

Hi - I'm currently working through a short-sale on a second house I own.  I took a new job in a different state and was carrying two house notes, both with 1st/2nd mortgages.  The "old" residence had been on the market since 11/06 with very little activity, due to a saturated housing market in that particular area (and sub-prime fallout).  I bought my now primary residence in March 07 and have been making all the payments on both houses up till now. 

It was very tight, but I was making all the payments and draining some assets hoping my first home would sell soon.  And I have a very good credit score, so I wanted to do all I could to maintain that.  I told the lender on the first house that payments were getting unbearable and wanted to know the options, since neither of us wanted foreclosure.  They told me a few options were available: short-sales, deed-in-lieu, mortgage adjustment (deferring some interest for a lower monthly payment).  I pursued the short-sale and as soon as I was done completing the application, an offer came on my house.  Now, I had been trying to sell my house aggressively, so it was priced $10,000 under my purchase price 2 years ago...the market headed south in the South!  Because I didn't put much money down orignially, I was going to be short in order to sell my house.

I am expected to be approved in the next day or so and will end up owing the bank approx. $10k (the difference from what I owe on the 2nd mortgage and the final net amount of the house including all closing expenses).  All they said is that I would continue paying the 2nd mortgage with the revised balance due to the sale of my house...just as if I had made a significant payment to lower the balance.  The terms remain the same and if I am current on all my payments, no adverse comments will be reflected on my credit report.  No point deductions.  A short sale doesn't directly hurt your score...not paying your bills does.  And short sales can be approved even when you are current on your payments...you just need to communicate with the lender.

I've done a tremendous amount of research on short-sales.  Again, if you are current on your payments, you will not be adversely effected simply because you did a short sale.  That is simply a change in the agreement b/t you and the lender to pay off the difference.  It allows the title to be cleared so that the property can be sold.  Everyone wants to avoid foreclosure.

Now, there are two options within a short sale arrangement.  You can agree to repay the difference on a repayment schedule similar to your current mortgage terms, or the lender may approve to 1099 and "forgive" the difference.  Your tax advisor would tell you the implications, but instead of paying the balance, you get taxed on it.  I believe it's taxed according to your particular rate.  Because you were forgiven this amount, it may show on your credit report as a negative, but not show as negative if you were current on your payments.  There's no way to tell how many points will be taken, but within 1-2 yrs of on-time payments will restore your credit score.

I've had to be very persistent with the lenders and it's like pulling teeth to get them to explain the details and process of a short sale proceeding, but it may pay off...the market is only expected to get worse.

 BTW...since the "short" amount only effected the second mortgage, the 1st mortgage lender wasn't involved at all.  They would get their money once the house sold.  So all my dealings were with the 2nd mort. lender.

Just one comment on for the Young Investors:

The lender was dragging their feet on my file as well.  When an offer is made, you usually have to accept/decline/counter within a few days.  When I called the specialist, he told me "there is no way I'm going to be able to approve the short sale in time so you may as well tell the buyer to move on to another house".  I almost hit the roof!  I demanded his supervisor and read her the riot act!  Amazing how quick they move when you push back on them.  The basic specialist probably combs through 20-30 short sale applications per month so you're just another application.  They'll try to brush you off, but stay persistent!  I would've called the CEO if I wasn't getting the service I was expecting.

But one thing to note about the deficiency judgement...the lender would have to approve the "forgiving" of the difference and send you a 1099.  That is rare.  Otherwise, you're liable for paying the difference from the final sale amount and the balance owed the lender at closing.  The deal won't be finalized unless the lender is paid in full (and releases any lien on the title) or agrees to a repayment/settlement plan - the house must be sold with a clean title.  They don't settlements simply so you have a clean slate...they will very likely reject your short sale unless you agree to a repayment schedule. 

Sorry, that last post was a comment by me regarding the notes provided by the Young Investors...I signed off as them by mistake....

Hi Jeff,

I really appreciate your detailed explanation. What can be more educational than personal experience? You are absolutely right. Once you negotiate a repayment of your do amount - it is not a short sale anymore and should not impact your credit rating.  I have a question for you. I see that you considered "deed-in-lieu of foreclosure. How do you see pros and cons of this solution. Have you analyzed credit impact of this option? Thank you again and good luck in completing your sale.

Jeff, thank you for your comment regarding the note provided by young investors.

The lender is still considering my deal a short sale as it changes the terms of the current loan arrangement.  Since I'm not able to pay off the loan at closing and require a temporary "concession" from the lender - which of course, I'll be paying back - they access that flexibility through this program.  But still no negative credit effect.  So I'm very fortunate there.

I've looked into deed-in-lieus as well.  Very different beast, and even more difficult to get a lender to approve.  The financial/tax implications of this process is significant.  If you are approved - which means you are moments away from foreclosure - there are two financial scenarios:

1. If the debt is forgiven, the lender would very likely come after you for the amount of the loan, unless you claim Chapt. 7 bankruptcy.  Since they "forgave" your loan, you will have a significant negative hit to your credit (as if several missed payments didn't hurt it already).  How much is unknown as the credit bureaus have quarky ways of calculating this and it may not be the same, but it is very negative either way.  Usually those who do a DIL, will file for bankruptcy.  This may stay on your credit report for as long as a bankruptcy as well - 7-10 yrs.

2. If the debt is forgiven and you don't declare bankruptcy, you will be sent a 1099 for the ENTIRE amount forgiven.  You'll probably receive a 1099 either way.  So, if you were forgiven a $250,000 mortgage, it will show up as taxable income (ouch!), and you'll still receive the negative credit rating.  Legislation is in the works to help relieve this, but is not approved as mentioned in an earlier post.

Also, in some states, you won't be able to purchase a home for at least 18 months to up to 3 years.

There really is no pros when you're in a DIL situation.  Since it is a very difficult position to be in financially, most people have declared bankruptcy, since a DIL is just as bad.

I'm no expert...just someone who's explored the options and has done a lot of reading! 

Hope this helps!

Jeff, thank you very much. It is extremely helpful and I hope that those pursuing differnt options theses days will get a chance to read your excellent write up. I really appreciate you taking the time and sharing your experience with us.

I have just begun the process of selling my home as a short sale.. Reading some of these experiences are like horror stories to me!! I am current on all my payments, but my property needs to be listed for 90 days at the current amount owed before I can drop the price.. I cannot get a 'short sale' packet from my lenders (1st and 2nd mortgage...100% financing.. 70/30 loans) until I have a buyer... and then, I guess the lender(s) have to approve the buyer and comb through all of my financials and whatever else they do before approving or denying them..

I'd love to preserve my credit, as it's in the 700s right now.. however, all this sounds like I'll be paying my mortgage for another 6 months or so before all is said and done.. and that's if I even FIND a buyer down here! (Fort Lauderdale, FL)

Another issue I have, I own a condo which was my primary residence for awhile... I put it up on the market and bought my house, as the market was still racing then.. I was expecting the condo to sell quickly (this was almost 2 years ago..) well, as soon as I bought my house, the market plummeted, and my condo still hasn't sold.. It's been rented for less than what I pay for the mortgage each month, just to balance out some of the costs of it...  

I'm at a point now where I'm ready to just walk away if things don't start working out with these sales.. I can definitely demonstrate hardship and the inability to pay for my mortgages now.. due to my dad's recent and very bad diagnosis of cancer, as well as the sale of the family business, which supplemented my income as a teacher... So, essentially I am losing a job as well as losing the monies that were given to me each month by my father (upon his passing..)  My realtor thinks I have a decent case to present to the lenders, but reading about how hard all this is really just makes me want to give up altogether... :(

I am lucky to be in a serious relationship with someone who already has and maintains his own home... the plan is to move in with him and we'll share the costs, instead of maintaining two (well, two plus the condo) households... This will be my first time 'relinquishing control' and moving in with someone... but with all the stresses and BS that this market and current time in my life have been causing, I'm ready for something different! 

 Anyway, thanks to everyone who's taken the time to post here! Very informative.        

Hi Alicia,

Please do not get discouraged. Thank you for sharing your situation. Absolutely do not give up. Every now and then we go through patches of hardship as you do now, but things do change and life gets better.  It is great that you have someone to support you in this difficult time.

Short sale is a frustrating process because, as you said, lenders don't want to talk until you have an offer . However, once wyou have it it should take no m ore than 6 to 8 weeks to get a resolution. For your information, I am working with a few clients of mine on solutions that will not effect their credit (have you seen a comment from Bill Nazur?). It is possible, however it is not easy. One of lenders I talk to is currently in bankruptcy proceedings and thy direct all (almost) calls including those to their management team to India. After long search and tens of calls to India, I found a local executive. 

 Good Luck!

Alicia - Be persistent with them on sending you a application packet...have it completed and submitted saves valuable time when an offer does come in!  There's no reason for them to wait until you have an offer.  Once you return the packet, they'll review it, order an assessment of the property and THEN wait until you have a signed final contract to proceed to the next step.  And since many buyers don't want to wait weeks to get a final decision, you'll have to press the lender to move things along.  If you don't, they focus on the squeeky wheels until you press them.

Jeff, this is a great advice for Alicia and anyone else in this situation. As a matter of facts it is what short form document usually require clients to do (within 7 days of receiving short sale document from the lender).  However when talked in person they alway require to have a seller first.  Some clients, like Alicia, are in better situation than most to be looked differently, I think. So, thanks Jeff for your comment.

Artur

I am back in town. Will call you tomorrow regarding that situation with your client. Been on the east coast for longer than expected.

Jeff

You are the model of a 'creative' situation that I've been preaching to others as a means of protecting your credit. We appreciate you. I have to tell you that I speak to several lenders and realtors, and you have exhibited more knowledge from reading and researching than 90% of the people I run into. Wanna become part of our industry.

Alicia

I don't know who your lender is, but the short sale package should be sent to you upon your request, so you can start filling out the required documents. It is true that you should not send it back until you have an offer, as the offer combined with the potential deficiency will give a real picture as to the possible deficiency, which as Jeff has recommended, does NOT need to reflect on your credit.

Bill Nazur; www.findingforeclosureexperts.com

Bill,

Thank you very much for your comments.  I will call you late morning tomorrow. 

I appreciate the comments...hopefully, someone will benefit from my experience.  I wish I had it when I was doing the research.

Bill - Great suggestion...my personal consulting can be offered for a small fee. :)  Maybe I can collaborate with you and Artur on a website designed to address these issues.  I would imagine the traffic would be enormous in the next 18-24 months.  In my experience, I've spoken with a few non-profit credit counselors who couldn't address my questions or provide the clarity a homeowner needs during this time.  Their websites are less than helpful as well.

Hi Jeff,

My apology for so delayed reply.  We are just launching a new service (I will have a post on that, hopefully soon).  I really appreciate your comments. I definitely am interested to discuss your idea with you.  In next few years many, many people can benefit from your comments.  Please let me know if you would like to switch this conversation to email or phone.

My husband and I bought a home about 18 months ago.. and discovered nearly $30,000 worth of foundation damage that was hid by the seller, which we are taking them to court over.  In the meantime our home has to be fixed to be lived in (which we can't afford) .. so we are going to try a Short Sale.  (And this blog has been very helpful with informing me on this!)  If we are able to do Short Sale.. we'll probably come out oweing $25,000.  My question is .. what type of term with they normally set-up the remaining balance of the loan on?  Is it at the same terms as the original loan or does it vary per lender?

 Thank you for your input!

Tricia,

I am sorry to hear about your and your husband problem. Thank you very much for sharing it wit us. Regarding your question, the answer is definitely lender specific. One option is that you will not have to pay and you will have to declare the difference as an income at the end of the year.  This solution, however, will damage your credit.  You can negotiate with lender a short term loan. It is definitely lender specific, but possible. 

Thank you Artur:

When you say 'short term loan'.. how short are we talking about?  5 years?

You welcome. The definition of "short really varies.  I have client who want it done within one year. But 2,3 to 5 is more likely. 

Tricia - From my experience, the lender is likely to extend the terms of your existing loan with the short-sale balance.  So, if you have a $1500/month payment on the short mortgage with a rate of 6.5% paid over 15 years, you would simply continue to pay that amount with the same rate and repayment period...the only thing that changes is the balance you owe (understanding that your balance owed is lowered due to the sale of your house and a portion of the funds paying part of the mortgage).  As Artur mentions, this could change from lender to lender.

If you can't make the $1500/month payment, then you may be able to work with the lender to pay a lower monthly payment, but that only inflates the balance you ultimately owe.

If the current interest rates today are better than the terms of your mortgage, you may want to consider taking a new loan to repay the remaining funds.

It would be rare to find a lender who would erase the funds you owe on your short loan.  But if you did, they would tax those funds as income.  If you were able to get a lender to erase the balance, then you were probably in a desparate situation already and were fully aware your credit was on life-support.

Hang in there...it is a tough financial situation to be in, but the lenders are more willing to work with you if you are willing to repay the short balance.  They are hurting for cash due to the subprime mortgage market and may be more flexible in working with someone willing to continue paying.

Please report your progress.  Thanks!

Thank you Jeff.

My husband and I have been relocated out of the country for his job.  We have been offered $780,000 for our home, but owe $805,000.  The house has been on the market for a year with little activity and this is the only offer in that time.  We can't continue to pay the mortgage on this home and are considering a short sale.

The company is paying our rent while my husband works here for the next 5 years and we won't need to purchase a home until our five years are up here and we are moved back to the US.

We understand our credit will be affected, but my main concern is our ability to buy a home in 5 years when we are relocated back to the US.  Will we have mortgage lender options or is an FHA the only option we will be offered?

My wife and I are going through this now.  Technically, we are doing a short sale, but we will be arranging a promissary note for the remaining balance.  This does not affect your FICO score since the terms will be the same until the remaining balance is paid in full.

 It was extremely beneficial to read everyone's experiences and comments. 

P.S. The idea for website would do extremely well in this time of need!!

Hi Todd,

A promissory note definitely should help and you should not lose additional points from your FICO. However, your FICO might already be damaged.  Usually lenders don't want to discuss a short sale unless borrower is already in default on one or more mortgage payments.  Was it the situation in your case? If yes, make sure that you discuss it with your lender and ask them to remove late payments report(s) to credit companies. 

Artur

First, let me express (along with everyone else) how useful the information provided has been. I have been doing research for some time and information is not always consistent. A lot of people think they know what they are talking about. This site is great!

I currently own a home that is valued less than what I owe on the loan by about 50K. I want to sell, but not because I can't afford the payments, but because I want to upgrade to a bigger home. Although I can make it now, my loan is set to adjust in October and it will be more unrealistic. My FICO score is important to me since I have worked so hard to get it to where it is. For personal reasons, I feel I could get the lender to approve a short-sale, especially considering that I could pay the remaining balance, allowing me to buy again in the near future with no problem.

Can I negotiate paying less than the remaining balance with the lender without it affecting my credit score? Or, does this mean it would be listed on my credit reports as "settled for less than full balance" and hurt my credit anyway. According to Jeff, if I can get the short-sale approved and I don't miss payments, it will not affect my score. David stated that the lenders would report "settled for less..." to the bureaus regardless, which would lower my score anyway. Please provide some clarity on, if there is a short-sale with no payment of remaining balance, does this differ from short-sale with arrangements of paying remaining balance in terms of how it is reported to bureaus? I want to protect my credit and not limit my options, but I also want to avoid paying in excess if I can avoid it.

I liked Jeff's idea of approaching the second mortgage lender so that the first is not affected and paid in full. My major concerns are regarding how all of these arrangements get reported, and how this would affect my score & future buying ability.

There have been enough experts on-line to give me guidance, please help...

Max   

Max,

Thank you very much for your comments.  Regarding your question, it really depends on the lender. Some will not talk you about short sale at all unless you miss a payment or two. In such situation, by the time your short sale is approved, your credit is already damaged - even if you agree to repay. At the same time lenders are becoming more and more overwhelmed with the amount of defaults and potential foreclosure they deal. While my experience doesn't confirm it, I heard from a few colleagues that Loan Mitigation departments are starting to do more for clients to prevent foreclosures. After all it might be much less expensive comparing with foreclosure, unsuccessful auction an then need to sell to wholesalers for 10c on a dollar. Coming back to the subject - the only way to know is to talk to you lender. It is in their best interest to help you. A lot of people started to opt for "deed in lieu of foreclosure". There is even a San Diego company doing it for clients for approx. $900. Let us know how you managed with your lender. We all would really appreciate it. Good luck.

I am considering a short sale for my rental property. This has been vacant for last six months and keeping on making monthly mortgage is hurting me in terms of debt. Monthly mortgage is about $3400/-.

I have engaged the services of a short seller and he has advised that I should keep other things current and stop making payments (since I am borrowing to make mortgage payments). This will hurt my credit but will not be so damaging since I will be current on other payments.

I own a total of 5 homes including my primary residence and 4 rentals. Do you know if I stop making mortgage payment on one rental (which I talked above) how will it impact my credit in short term and also in the long term. I would appreciate if you can provide approximately how many points. Also, my primary residence will be due for refinancing in 2010 how will it impact my ability to refinance. My credit score right now is about 750.

I am glad that you call me directly. As I mentioned a thing to watch are tax implications of a short sale.  The fact that you lost money, doesn't mean that you will not get 1099 at the end of the calendar year from the lender and you might have to pay an income tax on the difference "forgiven" by your lender.  While you might get lucky and the lender might "forget" to send you one, check with tour CPA (experienced in tax implications of short sales) before you go this path. According to other entries in this blog, the FICO score penalty for short sales is 150 point vs. 300 for foreclosure.  I have just received an email from "myFICO", the owners of the FICO algorithm, stating that there is no difference and that both are treated the same regarding the lose of FICO points. I don't have a way to verify it.  As a matter of fact, I will post this question to other "activerainers".

The recovery of 150 points might happen within 12 to 18.  Lose of 300, would take substantially longer to recover. 

Hi!  First off, thanks to everyone for all their great questions and responses!  It has been really informative. 

I have a question about a short sale that my husband and I are in the process of doing.  We built a home in 2005 and took out a VA insured loan.  8 months ago we relocated out of state for his job.  When we first put our house on the market we owed more than it was worth but would have been able to pay the difference at closing.  While we were waiting for our house to sell the market kept going down.  We have lost about 25% of value in our home and cannot come up with the new amount that will be needed to close.  We contacted the VA and they told us we had 2 options.  We could either do a deed in lieu of foreclosure or a short sale.  The VA will pay our mortgage company the difference in what is owed vs. what it sold for and all reasonable fees.  We do not pay the VA back unless we ever want to us our benefits again.  The VA also does not report this to the credit agencies.  We were told that mortgage companies usually report this as "compromise sale paid in full".  So my question is how will this impact my credit score?  Also, since the VA is paying the difference is it possible to get the mortgage company to not write anything at all?  How long until you can get a mortgage again after doing a short sale?  I guess that was three questions!  We are current with all our mortgage payments too.

Thanks in advance! 

Hi Krista,

If I understand it correctly, VA would pay the difference to the mortgage company. If that's correct - you will not get the 1099 from the lender for the difference, as you will not anything from the.  Assuming that VA will not send you 1099 and I believe that they would not, your credit should not be affected at all and you should be able to apply for mortgage immediately after your sale is completed.  Of course you will not be able to receive another VA loan unless you repay the difference.

I am glad that you found this post useful. 

Okay - first I want to respond to Krista - We are in a similar situation.  We would like to do a short sale and the bank thought we had VA insurance.  So I called them.  They told me if we did a short sale - we would owe them the money.  They would not garnish my husband's active duty wages but any tax return or entitilements we would get they would take until that amt was paid.  Come to find out we have private mortgage insurance through another company, I called them and discussed the short sale.  They basically said in summary - if anyone helps cover the mortgage that the sale did not cover then you will have to possibly pay that money back.  So even though the sale is over you will still have money you owe.

 This is so frustrating and people (banks / agents) do not want to explain excatly what will happen - i think because they really do not know.

Hi MD,

Thank you for sharing your story with us. It is unfortunate that VA guarantee works against you. It looks as VA ties future benefits to payoff of the difference.  It looks to me that someone might want to challenge it. Thus, they penalize you more that home owners with no guarantee! After all, per December 2007 decree home owners, neither have to repay the difference for selling their residences short, nor will be taxed on receiving 1099 for the difference.

I called Countrywide today to ask about the credit hit on a short sale and of course they couldn't tell me.  Is it generally agreed upon that the hit is 150 points?  How long will it take to recover that?  Right now I'm at about 710.  They did tell me however that a law passed in January so the shortage is not taxable anymore.  Is that true?

Thanks!

Hi Steve,

150 points drop is not "a science".  It is difficult really to predict the exact amount. One way to find out is to simulate the impact of short sale. For examole, CalCoastCredit company I am using for checking my clients credits score has a service that helps to analyze the impact of different actions, such as additional payment or effects of late payments.

The difference between the loan amount and the sale amount is not taxable at this time (since December), if a property is your primary residence.  It is taxable for investment properties. 

Can you advise on a mortgage company that will allow to carry the balance you owe to another mortgage.  Due to a divorce, I am currently in a home that I cannot afford.  I have good credit and am current on my mortgage payments, however I am concerned that if I do not sell soon I will not be able to keep it up.  If I sell now I will be upside down on my mortgage $10,000.  I have found a home more in my price range that is selling for $25,000 less than what it appraises for.  I was wondering if there are any morgage companies out there that would allow me to finance the $10,000 into my next home.  Also, if a mortgage waives your pre-payment penalty (mine is $5000), will that show up on your credit?  Thank you!

Hi Lee,

Please help me to understand your question better. If you sell now - I presume it would have to be a short sale. By the way, lenders don't let you to apply for a short sale, unless you miss your monthly payment(s) and this automatically would sppoil your FICO score and prevent you from applying for a new loan at the present time. Also, if you don't have equity, you will not be able to put any money from the current sale towards the new purchase. If your lender waives any funds (including prepayment penalty) it will most likely show on your credit.

What you might want to do is to negotiate with your current lender repayment of the difference over the period of several years.  In such case, your credit will not be affected and also you can ask them for additional $10k for down payment.  It is definitely worth to call the Loss Mitigation Department of your lender, explain the situation and ask them for help. They might be able to come up with a solution for you as it is in their best interest that you don't default on your loan.

MD,

  Hi!  When you said you thought you had a VA guaranteed loan did you call the bank or the VA?  We called the VA directly and got the response that I had previously stated.  They have been extremely helpful in answering a lot of our questions.  Unfortunately they can't really tell us what will happen to our credit because that will be up to the mortgage company.  I do know that you have to sign a promissory note on a VA loan if you took it out on or before December 31, 1989.  Here is the link to the Roanoke Regional VA info on Compromise sale http://www.vba.va.gov/ro/roanoke/rlc/forms/Compromise%20Sale%20Program.pdf  .  I'm not for sure this will help anyone since that is a different region.  I am actually from Virginia but stumbled upon this page through a web search.  Anyway, I know you said you didn't have  VA loan, but maybe this information can help someone else.  We went ahead and are attempting a short sale.  I don't mind paying back the difference just as long as we can sale our house!  

I don't think it should have a negative impact on theirn fica Score as long as they are not late. Of course their are tax problems . I hope the federal goverment considers giving a break to shortsales

Krista, Thank you very much for sharing information with us.

Daniel, thank you for your comments.  For your information - home owners are not charge income tax for the difference on short sale for primary residence since December last year.  

My experience....

Short sale in July of 2007.  Agreed with and signed a promissory not for the difference between what I owed on the house and what I sold it for (13,000).

I received a 1099 for the "forgiven"  amount.  Not sure how they think they forgave me when I am paying 220.00 per month to pay back the difference.

I couldn't get a loan if my life depended upon it now.  I have no late payments or anything negative on my credit except the short sale.  I have never been late on any payment ever in my life but now.....I can't get a loan and until 2014 the short sale will remain on my credit history.

Don't believe anything the mortgage company or real estate agent tells you because during this whole process I was reasured more than a couple of times that I wouldn't get a 10