Sellers may wonder whether doing a short sale would affect their credit less than completing a foreclosure, and whether there are other advantages between the two. While in foreclosure, and depending on state laws, a seller could possibly stay in the property, essentially rent free, for four months to a year before being forced to vacate. But that fact alone does not mean a foreclosure is better.
Whereas a short sale involves offering the home for sale, generally listed through MLS. Potential home buyers will make appointments to view the home, some will make lowball offers, agents might hold open houses and, in general, a seller’s life will be disrupted, all in the hopes that a buyer will buy the home.
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 or a lawyer can be a tremendous help by contacting the lender’s loss mitigation department to find out.
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. It used to be that lenders wouldn’t even consider a short sale if your payments are current, but that has changed. However, realize that 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.
Fair Isaac released a report that says credit scores are affected about the same, whether a seller does a short sale or foreclosure. Fair Issac says the average points lost on a FICO score are as follows:
Catherine Coy, a mortgage broker in southern California, agrees with Steep. “The effect on a consumer’s credit report — foreclosure vs. short sale — is the difference between being hit by a train or a bus,” says Coy, speaking about borrowers who are a few months in arrears.
For more information, see the Fannie Mae Selling Guide online. Click on the PDF link in the yellow box and see page 75.
FHA adopted guidelines in 2010 that say a seller who is current and does a short sale may qualify to immediately buy another home. Lenders aren’t so quick to follow those guidelines. However, Flagstar Bank gave an Elk Grove short sale seller a new loan within 2 months of closing his short sale, and that seller was current at the time.
Note that Fannie Mae guidelines allow a seller to immediately apply for a new loan to buy another home if that seller kept the payments current, had no delinquencies exceeding 30 days and did not agree to repay the debt relief. Moreover, it’s the late payments that dramatically affect your credit report, not the short sale.
If you’re a seller trying to decide whether to let a home go through foreclosure versus attempting a short sale, salvaging your credit may not be an advantage to doing a short sale, says Coy. She reports that according to “Score Factor Code #22, there’s no credit score advantage for a delinquent borrower on a short sale over a foreclosure.”
I have my doubts about that, though. From what I’ve seen, there is less damage to a credit report after a short sale involving late pays than a foreclosure. Moreover, another advantage for those with delinquencies on their credit is the ability to buy another home within 2 years over the 5- to 7-year period required for foreclosures. And there are other short sale advantages over a foreclosure. But seek legal and tax advice before making that decision.
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