FICO score - Foreclosure vs. Shortsale?
We better know the answer to this one!
When the 'short sale' activity began to gear up, the big question I heard over and over was "What's the difference to my credit score with Foreclosure vs. Short Sale?" Most didn't have the answer, but for those who claimed to, what I heard most often was that short sales had less of an impact on credit score than foreclosure did. As REALTORS, I fear we have a liability to our sellers when answering this question, and we'd better have it right.
Before you do anything else - suggest the seller discuss their situation with a real estate attorney an a trusted tax adviser.
According to MyFICO.com, quoted here,
"The common alternatives to foreclosure, such as short sales, and deeds-in-lieu of foreclosure are all "not paid as agreed" accounts, and considered the same by your FICO® score. This is not to say that these may not be better options for you from a financial perspective, just that they will be considered no better or worse for your FICO score.
If you are considering bankruptcy as an alternative to foreclosure, that may have a greater impact to your FICO score. While a foreclosure is a single account that you default on, declaring bankruptcy has the opportunity to affect multiple accounts and therefore has potential to have a greater negative impact on your FICO score."
Both result in a loss of between 200-300 points in the credit score.
OK, then what advantage does the seller gain by going through the process of trying to sell their home as a short sale? Consider the scenario.
1. MANY agents will not show short sale properties due to the brain damage inflicted by the time it takes it get an offer accepted and brought to closing. Whether it's because (I have been reminded), that the seller does not get the required information to the lending institution in a timely manner, or because the lending institution is overwhelmed in terms of manpower to get the job done, in most cases, it is a lengthy and time consuming process.
2. So the seller has decided to move forward with the short sale process, and has efficiently and timely provided the lender with the needed documentation. He/she has staged their home (hopefully!), to present it in it's best possible light.
3. Now, they look forward to the many showings they're expecting, and anticipate that buyer walking through the door. (The buyer pool that is limited due to agent and buyer reluctance to view short sale properties)
4. Their agent is doing all they can, open houses, online advertising, etc. to get the property sold in a neighborhood or town with many other property owners doing all they can to achieve the same end, read: competition.
5. If they're lucky enough to get an offer at all, it is probably going to be a lowball offer. It doesn't seem to matter these days how 'right' a property is priced, not all, but most offers coming in are lowball.
6. Assuming they accept the offer, then begins the process of negotiating with the lender.
7. Then there's the possibility of the seller being subject to a deficiency judgment. (This could happen whichever way the seller decides to go.) This requires discussion with a real estate attorney. State laws vary. Another possibility is the requirement by the lender that the seller sign a note (possibly and hopefully, at 0% interest) for the amount of the loss.
So. Why go through this brain damage? What IS the benefit of a short sale?
The benefit of a short sale is this:
In a short sale, new Fanny Mae guidelines allow for the purchase of a home after 2 years of maintaining good credit, with no additional requirements.
The new Fanny Mae guidelines require 5 years after a foreclosure, and are subject to additional credit and down payment requirements for 5 to 7 years.
Therefore, if it's all about 'saving' the credit score, forget it. If the seller thinks they might like to purchase another home as soon as possible, the short sale is the way to go.
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