Short Sales and Foreclosures Damage Credit

By
Real Estate Agent with Crye-Leike REALTORS® 165062

Recently we have been receiving a number of phone calls from would be buyers that feel they can buy a home right away because their agents falsely advised them that no damage was done to their credit. This blog post was precipitated by those direct consumer inquiries. 

I don't think this should come to a surprise to anyone in the real estate industry.  I real a lot of Blogs and real estate ads where agents are making pretty much false claims that 'Short Sales' are not "foreclosures" but they are.  "Avoid foreclosure" claims may just be a half-truth. The fact of the mattter is that short sales are just a less litigious and formal foreclosure process.  "Jingle keys" or "deed in lieu of foreclosures" basically damage the owners credit for some time to come.  It is a pre-emptive turning the keys over to the bank or trying to force a lender to accept less than what was agreed upon for repayment of the loan.  It is a deficiency and avoidance in principle and interest owed.  Real estate agents in Georgia are reminded that under state law that advising a homeowners of the tax and the consequences of a short sale is basically left to lawyers and their clients.  A real estate agent may be accused of the unlawful practice of law.  The best advice for anyone considering a short sale is seek legal council first and know how the process will effect you.

I recently spoke to several individuals about the consequences of a short sale and Lisa Talbot a loan officer in Roswell GA affilliated with Wells Fargo shared this with me:

"Short sales are seen as a type of foreclosure.  The direct implications are still evolving but we are being told that foreclosures, including short sales, could eventually end up staying on credit reports for as long as 10 years.  That is yet to be determined.  The rules are constantly changing and what we know is the rule today will not necessarily be the rule for tomorrow.  The only exception to the foreclosure and short sale implications would be a life changing event, typically a one time occurence as in the death of a spouse or a devastating medical condition."  Lisa Talbot Suntrust Mortgage

Fair Isaac, the company that compiles credit scores imply that A foreclosure and short sale inflict equal damage to your FICO score.  In their eyes there is not difference between the two.  Other than documented extenuating circumstances (illness or death of a wager earner etc) either process will make the borrower inelgible for 3 years for a mortgage insured by the Federal Housing Administration.  Either a foreclsoure or a short sale may limit the borrowers ability to purchase a home in the future. 

Posted by

James Crawford ABR, Broker Associate

 

 

 

 

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Tags:
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Ambassador
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Jim Crawford
Crye-Leike REALTORS® - Atlanta, GA
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Patricia Kennedy (Evers & Company)  No I don't.  It is like a 1000 persons ask you to treat them to lunch because you can write it off.  The banks will fail if the gap between the money lent and the value of the asset actually keeps declining.  It is a bottomless pit.  If anything, requirements may tighten much further.  It is a no win. 

Here is an example: Banks lent out 300K and are not made whole by taking back 175K.  Now times that by 1000 mortgages or 10000 mortgages...then factor in commercial and the Alt-A wave which will start to hit in April.  Where does the write off money come from?  If the banks have no other profit to take it from..where will they also get teh money to lend?  It just doesn't end.  No one has taken their personal responsibility seriously.  There is no accountability at the bank level, the individual, or the government level.  The banks certainly cannot let this happen again.  That is why we will be paying for this for years to come.

If more buyers had 20% into the game, this would never have happened.  We would be experiencing what we saw in the 1980's.  At some point the limiting factor would've been that we would run out of buyers with the 20% down... and prices would have capped.  Instead the banks and lenders kept lowering the standard. 15% down, 10% down, 5 % down, 3% done and then finally 0% nothing. The banks even removed the safety net of both access to credit, and removed the insurance PMI that could have protect this from happening.  Absolute insanity.

Jan 27, 2009 04:32 PM #12
Rainmaker
1,027,000
Susan Haughton
Long and Foster REALTORS (703) 470-4545 - Alexandria, VA
Susan & Mindy Team...Honesty. Integrity. Results.

I get annoyed when I hear the phrase "everyone is ENTITLED to a home."  Yes, IF they can afford it.  The entitlement mentality has caused a lot of this mess;  the banks (with heavy handed encouragement from the same fools pretending they are going to get us out of this mes) kept lowering the standard in order for everyone to get that home they thought they were entitled to have.  Then when the going got tough - values fell below loan balances - many people decided they didn't want it any more. You are right - personal responsibility has all but disappeared in many households.

I don't hear many people talking about the hit being taken by responsible folks, those who have seen the equity in their homes destroyed, despite faithfully paying their mortgage every month, whose neighborhoods are being affected by short sales and foreclosures. THAT is who I feel sorry for.

Jan 27, 2009 11:15 PM #13
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Susan Haughton Alexandria, VA REALTOR® (Long & Foster REALTORS® Old Town Alexandria)   Susan, I totally agree with you.  Entitlement is a loser.  Some people should just rent.  When we purchased our first home we worked overtime for an entire year, not eating out,and we saved up the down payment to buy the home. We paid 15.5% mortgage.  $1500 a month mortgage for a 70K loan!  Congress must be bigots to knowingly screw minorities by allowing them to get mortgages that they knew they could never ever be able to repay.  That is what happens when you buy votes.  There are nasty consequences to others.

Jan 28, 2009 12:53 AM #14
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Frank Rubi
Frank Rubi Real Estate, LLC - Metairie, LA
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Jim, I would thing in my limited capacity that any thing short of full payment of a contract will affect your credit score.

Jan 28, 2009 02:47 AM #15
Rainmaker
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John Walters
Frank Rubi Real Estate - Slidell, LA
Licensed in Louisiana

Yep don't do it unless you have no other alternative.  There is a reason it's called a credit history.

Jan 28, 2009 06:32 AM #16
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Jim Crawford
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Frank Rubi -Louisiana Real Estate- (7824 Real Estate of Louisiana, LLC.)   I agree, but evidently loads of agents are telling sellers it will not.  That is the reason I wrote the post.  I have had several calls in the last week or so where sellers have advised us that their agents told them to do it.  I have a problem with that.

Jan 28, 2009 08:06 AM #17
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Jim Crawford
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John Walters (7824 Real Estate of Louisiana)  I agree...that is why it is called "Short Sale!"  In sufficient funds to pay off what is owed. 

Jan 28, 2009 08:08 AM #18
Rainmaker
175,187
Richard Stabile
Re/Max Real Estate Limited - Oradell, NJ
Bergen County New Homes Builder Realtor

Jim:

Well said, if the borrower homeowner doesn't negotiate with the leaner not to report it as a short write down then they had a failed loan. If it staying for 10 years or haw it will affect the look at credit in years to come is uncertain. Last payments stay on for 7 years. They hurt your credit score. A foreclosure is devastating. I think a bankruptcy, stays 10 years, but you will get credit to some extent in 3 years if the bankruptcy is over.

The point is just logical. If you borrowed money for a house and failed, it is hard to get trust back again from a lender.

Homeowners should as you said get legal advise. They maybe able to negotiate their credit report status with their bank and not have it show as a foreclosure. That would be the best way.

Richard

Jan 28, 2009 10:07 AM #19
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Richard Stabile Bergen County New Homes Builder Realtor (REMAX real estate associates)   Thansk so much Richard.  I think there is a knee jerk reaction that advising homeowners is what we do, but there are many ramifications of a homeowners actions.

Jan 28, 2009 10:59 AM #20
Anonymous
Phil

I blame the credit rating agencies for not divulging the formula used to generate  the credit score and the laying out the rules for items showing on the credit report. Next, I blame all the "empty barrels" who must just get narcissistic pleasure hearing themselves speak on topics they know little about... Last, I blame the consumer who if they didn't know the rules of the game before they started playing , deserve and should fail so a lesson can be learned and behavior changed.

Is this not all common sense or should i try smoking weed so I fit in with todays popular culture???

Jan 28, 2009 12:27 PM #21
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Jim Crawford
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Phil - Well said.  Information, personal responsibility, don't commit to something if you do not understand what what you are signing - get a lawyer.  That is why those purchasing a home in any state must be competent.

Jan 28, 2009 02:03 PM #22
Rainer
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Jen Olson
First Weber Group Realtors - Marshfield, WI

Jim,

What a great post!  And great comments, as well.  I think we all need to remember that we real estate agents, not lenders, lawyers or tax advisors!  I have also heard agents talk to people about things that should be left to a contractor or a home inspector.  The old Jack of all trades, master of none attitude leaves the door open for legal/professional consequences.

Jan 29, 2009 09:16 AM #23
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Jen Olson (First Weber Group Realtors)  Jen thanks so much for your comments.  They are right on the money!  I love your live about "The old Jack of all trades, master of none attitude leaves the door open for legal/professional consequences." It does not seem to bother the agents that are advertising their services as "Short sale specialists" all over the place!  They probably never even have closed 1 short sale!

Jan 29, 2009 09:47 AM #24
Rainer
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Jen Olson
First Weber Group Realtors - Marshfield, WI

Jim,

This reminds me of the bad credit, no credit, no problem ads!  I think there are agents that list REO properties that are a little out of their league, as well. 

Jan 29, 2009 10:15 AM #25
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Jim Crawford
Crye-Leike REALTORS® - Atlanta, GA
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Jen Olson (First Weber Group Realtors  I agree.  An aquaintance...that specializes in foreclosures had their own home foreclosed on recently.  An admitted fatal mistake was in listing them for a flat fee, but the problem was they could not pay thier own bills because of the overhead...and lack of income.  Doesn't sound like a plan.

Jan 29, 2009 10:41 AM #26
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Patricia Kennedy
RLAH Real Estate - Washington, DC
Home in the Capital

Jim, I think that a lot of the people who are caught up in this whole thing don't have a clue.

Jan 29, 2009 03:26 PM #27
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Jim Crawford
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Patricia Kennedy (Evers & Company)  I agree.  Like my friends in Ireland would say..."They haven't a clue!"

Jan 30, 2009 12:45 AM #28
Rainer
179,681
Erik Hitzelberger
RE/MAX Alliance - Louisville REALTOR-Luxury Homes - Louisville, KY
Louisville - Middletown Real Estate

Jim - The lenders that I work with have lower time restrictions for borrowers who go through short sales than for those who go through foreclosures or declare bankruptcy.  However, the time is still measured in years!  One quick call resulted in 3 years for a short sale vs 5 years for a foreclosure.  While this is a relative improvement, it falls just a little short of 'no damage being done.'  Further, your point about future lending practices is well-founded.  It's tough enough to guess what lending standards will be 3 weeks from now.  A Magic 8 ball would be about as accurate as anything else for predicting requirements for 3 years from now.    

Jan 30, 2009 07:34 AM #29
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Jim Crawford
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Erik Hitzelberger, --Louisville-Bullitt County Real Estate (RE/MAX Alliance)  Thanks for the info.  I like that.  short-sales may be the lesser of evils, but one must realize the rules are changing by the day.  Preserving your good credit should be a first priority.  The easy way out for some, may create years of future hardship.

Jan 30, 2009 07:46 AM #30
Anonymous
Phil

We're selling our house in California right now on a short sale.  We had perfect credit before and are upset about this, but the Fannie/Freddiie wait limit for short sales is quicker than regular foreclosure.

Before somebody gets on their soapbox and starts preaching that we didn't put enough down - we moved cross-country for work reasons, never missed a prior payment, and watched our house that appraised at $680k drop in value.  We finally have a short sale approval now at $315k.  

 

Regular people can't absorb that kind of hit, no matter how well you plan it.  So we'll be renting for a while - but there are many distressed sellers that don't mind seeing us.

Feb 02, 2009 08:55 AM #31
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