The Short Sale Process
Both foreclosure and a Deed-in-Lieu of Foreclosure affect credit the same. Home owners will take a hit of about 250 points on their FICO score. This means if a their FICO score before foreclosure was 680, it could dip as low as 430. A home owner who wants to buy another home after foreclosure will end up waiting about 24 months before a lender will offer any kind of interest rate that makes sense. During that time you must have a near perfect credit.
The affect of a short sale on a home owner's credit report is much less damaging. The negative on credit may show up as a pre-foreclosure in redemption status, which will result in a loss of around 80 points from the FICO score. It can also simply show up as the loan was paid off and not affect your score at all. This means a short sale with a previous FICO of 680 could possibly see it fall to around 600 or it could remain the same.
If a home owner is trying to decide whether to let a home go through foreclosure versus attempting a short sale, salvaging your credit is the main advantage to doing a short sale.
What is a Short Sale?
A short sale is when the lender of record agrees to discount their payoff to accommodate a sale when:
•1. the Borrower/Homeowner has experienced hardship
•2. the value is proven to be less than the amount needed to payoff all loans/encumbrances and real estate/selling costs
•3. the loan is delinquent/in default
How does a Homeowner benefit from a Short Sale?
- The Homeowner can avoid having a ''foreclosure'' on their credit report. Most lenders tend to report "settled" upon successful closing of a short sale. Recent reports state that if a borrower misses 2-5 mortgage payments their credit score will be affected by an estimated 30-80 points. If a borrower suffers foreclosure, it can affect their score 140-250 points.
- Assuming the Homeowner is already not making mortgage payments, they can continue to live in the property and not make payments during the lengthy short sale process. (Up to six months) They should use this time to save money for their next place of living. The lender of record actually prefers that the borrowers continue to live in the property.
- Most Homeowners feel it is the "right thing to do" when in default. They tend to feel that walking away from the house is irresponsible and unfair to the lender. It's a respectable option.
Why would a lender agree to this?
- Not having another "Bad Debt" on the books. Most investors require their lenders to not exceed 3% of bad debts on the books.
- Not having to complete the expensive foreclosure process including all of the legal fees and procedural duties.
- Not having to evict occupants and pay for their cooperation.
- Not having to rehab the property. (i.e. contractor bids, disgruntled borrower vandalizing, etc.)
- Not having to later sell the property for no more than the proposed short sale would generate, or even less when the market continues to decline.
- Not having to pay a commission to the R.E.O. Broker they choose to market and list the property for them.
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