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Short Sales and Foreclosures Impact on Credit Reports

Some think that letting a property go into foreclosure is easier and smarter than going through a Short Sale. In California with a foreclosure a seller could stay in the property, essentially rent free, for four months to a year before being forced to evacuate. That fact alone does not mean a foreclosure is better.

A short sale involves offering the home for sale. Potential home buyers will make appointments to view the home, some will make offers, agents will hold open houses and, in general, a seller's life will be disrupted, all in the hopes that a buyer will buy the home and the bank will agree to the terms of the sale.

Basics of a Short Sale

Short sales happen when a lender agrees to accept less than the amount owed against the home because there is not enough equity to sell and pay all costs of sale. Not all lenders will negotiate a short sale, and that is why a real estate agent can be a tremendous help by contacting the lender's loss mitigation department to find a middle ground where the lender(s) will agree to the sale.

You can't just wake up one morning and decide you're going to sell your home at a loss by asking for a short sale. Typically, lenders won't even consider a short sale if your payments are current. Lenders will be more agreeable to negotiation if your payments are in arrears. Plus, if you have cash assets, the lender might try to tap those accounts. Doing a short sale is not for the faint of heart and should not be attempted without the assistance of a Realtor.

How is the Seller's Credit Affected?

According to various lenders, sellers will take a bigger hit on their credit report by going through foreclosure or giving the lender a deed-in-lieu of foreclosure. The points lost on a Fair Isaacs Credit Score (FICO) score are as follows:

  • Foreclosure or Deed-in-Lieu of Foreclosure
    Both of these solutions affect credit the same. Sellers will take a hit of 250 to 280 points. This means if your FICO score before foreclosure was 680, it could dip as low as 400.
  • Short Sale
    The affect of a short sale on your credit report is much less damaging. The ding on credit will show up as a pre-foreclosure in redemption status, which will result in a loss of 80 to 100 points. This means a short sale with a previous FICO of 680 will see it fall to 580 to 600.

    When can You Buy Another Home?

  • Foreclosure or Deed-in-Lieu of Foreclosure
    After a foreclosure you will need to wait about 36 months before a lender will offer any kind if interest rate that makes sense.
  • Short Sale
    The good news for short sale sellers is the wait is much shorter before buying another home. You should be able to buy again in about 18 months at a decent interest rate.

Short Sale / Foreclosure Deficiency Judgments

The bad news is a seller could be subject to a deficiency judgment for the difference between the loan amount and the amount paid. In California, purchase money loans are not subject to deficiency judgments; however, hard money loans, equity loans and refinances are. Now these are the rights of the lenders, in practice the lender rarely exercises their right to seek a deficiency judgment.

The lender has sole discretion whether to pursue a deficiency judgment in those instances when the judgment is permitted. To determine whether a pending foreclosure or short sale is subject to a deficiency judgment, talk to a Realtor.

If you're a seller 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. But seek legal and tax advice before making any decision of this magnitude.

Whatever your situation or choice in the different options you have available to you Empire Realty is here to help you. We have confidentially helped hundreds of people and can help you!

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