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Short Sale
Short Sale & Foreclosure
Effects on Credit
Basics of a Short Sale:
Short Sales happen when a lender agrees to accept less than the amount owed on the home since there is not enough equity to sell and pay all costs of sale. Not all lenders will negotiate a Short Sale, which is why a Real Estate agent can be a tremendous help by contacting the lender’s loss mitigation department.
You can’t just wake up one morning and decide to sell your home at a loss by askingfor a Short Sale. Typically, lenders wont’ 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 may try to tap those accounts. Doing a Short Sale is not for the faint of heart.
How is the Seller’s Credit Affected?
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 FICO score(the formula used to assess a borrower’s risk factor) are as follows:
Foreclosure or Deed-in-Lieu of Foreclosure:
Both of these solutions affect credit similarly.
Seller will take a hit of 250 to 280 points. This means if a seller’s FICO
score before foreclosure is a 680, it would dip as low as 400.
Short Sale:
The affect of a Short Sale on a seller’s 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.
Importantly, borrowers must realize these numbers are only theory. They
must continue to be responsible with their outside consumer debt. Often if
the hardship is financially related, borrowers fall behind on other consumer
responsibilities beyond mortgage related issues.
Waiting Period Before Buying Another Home:
Foreclosure or Deed-in-Lieu of Foreclosure:
Recently Fannie Mae, Freddie Mac have changed their guidelines. Foreclosure is a minimum of a 5 year waiting period with a minimum of a 680 FICO and 10% down. A Deed-in-Lieu is four years with 680 FICO and 10% down.
Short Sale:
Two years, no minimum credit score and no minimal down payment. These numbers are extremely important to know.
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, some equity loans and refinances are. Other states have laws regarding personal guarantees, which could also result in a deficiency judgment if the home owner is personally liable for loan repayment.
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 deficiency judgment, talk to a real estate lawyer.
For sellers trying to decide whether to let a home go through foreclosure verses attempting a Short Sale, salvaging their credit is the main advantage of doing a Short Sale. Be sure to seek legal and tax advice before making this decision.
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