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Short Sales or Foreclosure? How is your credit affected?

Homeowners wanting to stop foreclosure are faced with a number of options, one of which is doing a short sale. Sometimes, depending on a person's situation, they may allow a property to go into foreclosure instead of attempting a short sale. Many times the foreclosure is a result of not knowing one's options and in other incidences the bank just will not cooperate. However, by accepting a short sale, the lender can avoid a lengthy and costly foreclosure, and the owner is able to pay off the loan for less than what he owes. The primary consideration above all is the affect both can have on your credit score.
So how does a short sale basically work? The design of a short sale is really simple. A short sale happens when the sale proceeds of a house are not enough to pay what the owner owes on the mortgage or debt on the property. Many lenders or lien holders will agree to accept less than what is owed from the homeowner and forgive the shortage on the mortgage or lien if the owner was financially incapable of paying. Beware and be warned that not every lender or lien holder will negotiate. If your payments are current or the lien holder believes that you have the ability to pay, then most lenders have no interest in negotiation.
Another consideration is tax liability on the difference between the sale amount and the original loan amount. Although President Bush signed Mortgage Forgiveness Debt Relief Act of 2007, it is always advisable to seek legal advice when doing a short sale transaction. Short sales require much patience and strong nerves.
So then what destroys my credit the most? Foreclosures, without a doubt will incur more damage on a seller's credit report than a short sale. Typically your credit score will take plunge between 200 to 300 points in a foreclosure. Short sales have a far less damaging affect on a credit report. Credit scores typically lose between 80 to 100 points. Down the road it takes around three years after a foreclosure before a lender will offer a sensible interest rate, whereas for a person who went through a short sale typically waits around 18 months to buy another home at a good interest rate.
Salvaging your credit should always be the primary concern when making the decision between a short sale and stopping foreclosure. The savings in interest payments alone should be convincing enough for most people, not to mention your buying power in the near and distant future.
Short sales are not an easy process to complete and there are many things to consider when doing a short sale. It is suggested that one should use a professional when buying or selling a short sale. A realtor specializing in short sales is an excellent starting point. If you are in a situation where you believe that you owe more than what your place is worth and just can not afford to pay your mortgage. Call a good realtor or real estate expert for advice and help.
Jason Gobeli of the GoBelly Group of Connect Realty can be reached at 877 SOLVE THIS
(that's 877-765-8384) or you can email him at gobeli@connectrealty.com

Posted by Jason Gobeli on 04/30/2008 12:50 AM

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7 Comments on Short Sales or Foreclosure? How is your credit affected?

What a great explaination, Jason. I'll be using this to educate my customers. Thanks!

04/30/2008 01:42 AM

by Roswell Georgia Real Estate Agent - Nancy Rivera (RE/MAX Leading Edge in Roswell Ga)

The short sale takes a lot of bargaining, and if the loss mitigator wades through molasses or waits for the market to correct your client could end up in foreclosure. The lender's work out team, assigned to the debtor, sadly can play roulette with the debtor's home in a short sale, and many times the lender will take their chances at the foreclosure sale on the court house steps, and turn down the short sale offer, if they think the investor pool might net them what they're looking for. I've seen it happen. I've actually seen the lender refuse a short sale offer that would have nearly paid off the first mortgage and the home went to foreclosure. The lender lost 30 thousand dollars because they wouldn't accept the short sale offer three weeks before the foreclosure sale at the courthouse, which would have almost paid off the first. The second had 20k on it and went to bankruptcy. The debtor was actually nine months behind on their mortgage payments at the time of the short sale offer. A listing agreement kept the home out of foreclosure during that time. Good post, Jason. Have a good week.

04/30/2008 01:51 AM

by David Saks (The Real Estate Mart of Tennessee, Inc.)

Great explanation! I knew a short sale was less damaging on your credit, but I didn't know the point difference. Thanks for sharing that!

I know lenders can now 1099 the homeowner for the "loss". From what I understand, the homeowner doens't have to pay taxes on the 1099 if their liabilities exceed their assets. Are you familiar with that at all?

04/30/2008 06:30 AM

by Jennifer Kladny Loan Officer ~ Armstrong Co, PA (1st Metropolitan Mortgage)

Thanks for explanation -- I always wondered how much a short sale would affect credit vs. a foreclosure. I have a client I'm helping with a short-sale, and have been in conversations with the bank. I think we are getting close to getting acceptance.

04/30/2008 08:17 AM

by Kathy Torline-Nordstrom KAT, an expert you can trust in Colorado Springs, Colo. (Prudential Professional REALTORS)

Thanks for the information. I think that it is also viewed differently depending upon the area. Here a short sale is essentially seen as the same as a foreclosure and has similar effects.

04/30/2008 09:47 AM

by Matthew Zgonc, REALTOR® for Modesto, CA (ERA Village One Real Estate)

There is a common misconception that a foreclosure is worse then a short sale. In the eyes of lenders a short sale is as much of a default as a foreclosure. What this means is that a short sale and foreclosure have close to the same damaging affect to your credit score. The lender is happy to accept a short sale when they can save the cost of foreclosure proceedings and gains back some of the losses from the defaulting borrower. When lender believes that they will be more profitable by proceeding with a foreclosure they will deny a short sale. Short sales also help bargain hunters pay substantially less for their dream home. A short sale does not help the owner in the situation of foreclosure. The lender or bank records a short sale the same as a foreclosure. I hope I have been helpful. And again Jason that was phenomenal explanation, just wanted to shed some light on a few details.

04/30/2008 10:34 AM

by HD Jordan (Diligence Corporation)

One thing a person should look at when doing a short sale is that it is better than a foreclosure in that a executed short sale never becomes a foreclosure on public record (filed at the courthouse). Many credit applications ask if you have a foreclosure on your record not if you were ever in foreclosure. As for credit reporting agencies, they both have negative impacts on credit, that is obvious. It is just that the public record of a foreclosure takes a bigger point hit. Bottom line if you are late with your mortgage and currently in foreclosure, The worst thing that you can do is nothing. The best thing you can do is to seek help from a real estate professional. Beware of foreclosure scam artist though when seeking help. There are those out there who take advantage of people in foreclosure. Here in California, even though there are severe laws in place to protect those in foreclosure these predators are very active and advertise to help. Then charge a fee. Asking for money or the deed to your house in order to receive help with your foreclosure is a big red flag. I would always suggest seeking help from Realtor not just a real estate agent. These professionals have a code of ethics to follow that is why it is a good place to start. I hope this sheds more light on the subject.

Jason Gobeli of the GoBelly Group of Connect Realty
www.gobelly.com/solutions

04/30/2008 11:01 AM

by Jason Gobeli (GoBelly Group of Connect Realty)

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