How Will A Short Sale Affect My Credit?
Jan 20th, 2008 by Afiya
Homeowners who are in financial difficulties and facing foreclosure often opt for a short sale in order to escape the foreclosure process. A short sale simply means that the amount of the mortgage balance owed is greater than the current market value of your home. This is precisely the situation now across the United States where the sub prime adjustable rate mortgage mess has caused mass foreclosures and significantly reduced the value of real estate.
A short sale takes place when the lender agrees to accept less than the amount you owe him on your mortgage because you don’t have enough equity to sell the home and pay all the costs of the sale. And make no mistake, the lender must agree or you’re out of luck.
Who makes a short sale happen?
Most banks and financial institutions will not be willing to negotiate a short sale. Therefore, you will need the services of a good real estate agent or a lawyer. They will have to contact the bank’s loss mitigation department to find out if they will sell. And they may not. If you are current on your payments, but have just lost your job or suffered a major family illness, the lender has little incentive for a short sale. Moreover if you are very far behind and there is a major arrearage, they will usually just let the foreclosure proceed. The one exception might be if you are just one to three months behind and explain the situation properly, the lender might say yes. That’s the Catch-22. Keep in mind that if you have any cash assets, your lender may try to appropriate them to cure any default amount.
Consider the effect on your credit report
You will suffer much more damage to your credit report with a foreclosure than you will with a short sale. It will also take considerably longer to restore your credit rating once your financial difficulties are resolved. In general, here’s what happens:
For a Foreclosure or Deed-In-Lieu of Foreclosure
- Expect about the same things to take place. Quite often this means a loss of between 200-280 points on your FICO score. A pre-foreclosure FICO of 675 could drop to as low as 395, essentially eliminating you from future credit approvals. It may be as long as three years before you can qualify for another home loan.
For a Short Sale
- Expect to suffer some credit score damage, but nowhere near as much. Loss of FICO points will be around 75-125 and your report will show it listed as a ‘pre-foreclosure in redemption’ which is far less negative. You will most probably be able to secure a new home loan in about a year and a half.
In any case, it is a good idea to consult with a lawyer, tax accountant (CPA) or a good real estate agent who is experienced with short sales. These professional may charge you a bit for their services, but failing to have the right counsel could end up costing you a sizeable bundle. So don’t consider going it alone. Get the help you need.
