Short Sales & My FICO Score
The TRUTH is - Lenders are inclined to agree to a short sale if a short sale results in less loss to the lender as compared to foreclosure...it is ALL based on MONEY! The advantages of a short sale to the borrower include avoiding a foreclosure which would be reported on the borrower’s credit history and mitigating or eliminating a possible deficiency. A foreclosure on a record usually prevent a borrower from purchasing another home for years, obtaining a job, including government jobs and those that require security clearance, and will adversely affect future mortgage rates, credit card rates, automobile insurance, and credit in general. A short sale is reported on your credit report as a settled debt for less than the amount owed. It is important to understand that the lender will continue to foreclose until the lender is confident either a short sale offer has been submitted and is under review or a short sale closing takes place. Time is of the essence if you are delinquent or anticipate to be delinquent with your mortgage. Work on your short sale!!!
Read below for implications to your life focusing on FICO score.
Implications of Short Sale
The number one reason a distressed homeowner should proceed with a short sale is to protect their ability to obtain financing in the future. Most short sales result in a “settlement” status on their credit report as opposed to “foreclosure” if foreclosure proceedings have not started. If these proceedings have started, the agencies may report “foreclosure proceedings started, short sale.” Fannie Mae and Freddie Mac guidelines are much more favorable to borrowers with short sale on their credit report, typically allowing a borrower to obtain financing for a new home within a couple of years. In sharp contrast, a foreclosure remains on a credit report for seven years, making it very difficult to finance another house, a car, open a new business, or even qualify for credit cards. Any loans received will most likely bear very high interest rates. Bottom line: the end result of a short sale is minor when compared to the consequences of a foreclosure. If the homeowner gets through a short sale with only being delinquent on their mortgage a month or two, the impact is very minor. In sharp contrast, foreclosures have a devastating effect on credit history, job security, employment opportunities, security clearances, military and law enforcement careers, and the most serious of all - the ability to purchase a home in the future. Also, a foreclosure becomes public record, which is searchable by anyone, and can never be removed. A Short Sale offers a fresh start, eliminating debt, while minimizing damage to credit and avoiding eviction proceedings.
Future Home Purchases - Homeowners who go through a foreclosure cannot apply for an FHA loan for 5 years after the date of foreclosure (7 years for investors), but homeowners who complete a short sale can apply for an FHA loan 3 years later. When homeowners apply for a loan through a mortgage company, they must state on the application if they have had a property foreclosed upon or given a deed in lieu of foreclosure within the last 7 years. There are currently no questions on standard mortgage applications asking whether or not a homeowner has ever completed a short sale.
Credit Score - A foreclosure will typically lower a homeowner's credit score by somewhere between 250-300 points and this decrease will last approximately 3 years. Short sales can often affect an owner's credit by only 50 points and that decrease may sometimes be remedied in as little as 12-18 months.
Security clearance - With a foreclosure anyone needing to have a security clearance (police, military, CIA, TSA, etc.) will in most cases have their clearance revoked, terminated and/or not renewed. With a short sale, it does not challenge most security clearances.
Current employment - Employers have the right to check the credit rating of their employees on a regular basis. A foreclosure in many cases is grounds for immediate reassignment or termination.
Future employment - Many employers are requiring credit checks on job applicants. A foreclosure is one of the most detrimental credit items an applicant can have and in most cases will challenge employment. With a successful short sale only late payments will be reported.
Tax Issues - Typically, as long as the property being short sold is your primary residence, there are no tax consequences in a SHORT SALE. However, it is always best to talk with a tax advisor about possible tax repercussions as HELOC and equity loans may be treated differently. If we are short selling investment property such as a rental property, the Seller may still be exempt from taxes on the forgiveness of debt if they can show insolvency. Again, you will need to consult your tax advisor.
Convincing Your Lender to Say YES!!!
The bank will have to be convinced that the client deserves to be approved for a short sale. They will need to disclose hardships, including layoffs, divorce or medical issues. It will be necessary to provide the lender documentation of your financial hardship, such as pay stubs, bank statements and so forth to confirm to the lender that you are worthy of a short sale. The lender will seek an independent appraisal of your property (customarily called a BPO), run a credit report to see if there are any recent purchases and the amount of debt you owe. They may run an independent title search of the property to ascertain additional debtors such as co-owners of the property and other liens or judgments and will consider any additional co-signers on your mortgage loan as potential debt recovery prospects. Short sales often take longer to close than more conventional sales, so plan accordingly. The process can take months to complete after the contract is submitted to the lender . . . or the lender may also want a closing scheduled upon approval within a few days of the acceptance of the short sale by the bank.