Short Sale & Your Credit Score
- Understand whether or not you will be responsible for a deficiency balance prior to finalizing your short sale.
- Compare the effects on your credit rating of a foreclosure to those of short sale.
- Speak with an experienced attorney, before you decide to pursue a short sale..
How will a short sale of my home affect my credit?
How will a short sale of my home affect my credit?
Editor’s note: See the Bills.com resource Short Sale, Foreclosure & Your Credit Score to see Fair Isaac & Co.'s answer to this question.
Generally speaking, a short sale occurs when a homeowner who is behind on his or her mortgage payments, and who owes more on his home than it is currently worth, contacts the mortgage lender asking the lender to allow him to sell the home for less than the balance of the mortgage.
For example, if you owe $100,000 on your mortgage, but are only able to sell your home for $80,000, you would need to have your mortgage lender agree ahead of time to allow the sale to proceed. In fact, there is little use in putting your home on the market until you, or your attorney, have spoken with your mortgage company's loss mitigation department to discuss proceeding with a short sale.
Many lenders will authorize short sales in an attempt to prevent property from falling into foreclosure; however, some lenders will not allow short sales to proceed. Usually, no lender will authorize a short sale unless the borrower is already in arrears on his mortgage, as the lender will see this as evidence that the borrower can no longer afford the home. In addition, your mortgage lender's loss mitigation team will probably want to see documentation of your income and assets to verify that a financial hardship exists and that you truly cannot afford the home.
If your mortgage lender approves a short sale, the next step is to find a buyer willing to pay a reasonable price for the property. Some people try to take advantage of individuals who are trying to conduct a short sale by offering significantly less than the home is worth, hoping that the owner will accept the offer out of desperation. Once an offer is made on the home, you will need to consult with your lender, and the lender will have final say-so in whether or not the sale can proceed at the offered amount. When first talking to the loss mitigation department, you may want to inquire as to what amount the mortgage lender considers reasonable so you can gauge what offers you can expect to have approved.
If you are successful in selling your home in a short sale, you may still be liable for the difference between the amount you owed on the mortgage and the amount of the sale. This is referred to as a deficiency balance.
If you owe a deficiency balance, your lender may be able to pursue you for collection of the debt, depending on your state's laws regarding deficiency balances on homes. Some states, such as California, do not allow for the collection of deficiency balances on purchase money loans. However, if you live in a state which does allow for the collection of deficiency balances, your creditor may be able to sue you and obtain a judgment for the amount owed.
Many creditors do not pursue former homeowners for deficiency balances even in states where they are allowed to do so, preferring to use the loss as a tax write-off. I encourage you to discuss this with your mortgage holder and an experienced real-estate attorney prior to proceeding with a short sale. An experienced attorney should be able advise you of your state's laws and may also be able to assist you in negotiating with your mortgage lender.
In regards to your credit score, the negative credit impact of a short sale is less than that of a foreclosure. A short sale will not appear as a foreclosure on your credit report, and therefore only the previous delinquency on your mortgage will appear. Also, I believe that most mortgage lenders report a mortgage that is paid through a short sale as being in a redemption status.
Although the delinquency and change of status on your mortgage loan will certainly lower your credit rating, from my experience, the negative impact is less than the negative credit implications of an actual foreclosure. If you must choose between a short sale and allowing your home to go into foreclosure, from a credit perspective, a short sale is the wiser choice.
Again, I encourage you to speak with an experienced real estate attorney to discuss the details of your situation to help you determine the best course of action in your circumstances. To learn more about foreclosure, short sales, and other options available to homeowners struggling to meet their mortgage payments, I encourage you to visit the Bills.com Foreclosure page.
I hope this information helps you Find. Learn & Save.
If you want to do a short sale, then you will have to speak to your lender. You will want to see how much principal reduction the lender will agree to and also if your deficiency balance is subject to any anti-deficiency non-recourse laws.
If you are current on your loan it is possible that you can get a FHA 203k loan, although this will also depend on your other debts, including how you finalize a short sale. Your maximum loan would be about $96,000 based on a FHA loan which requires at least a 3.5% down payment. You would also need money for the closing costs.
I recommend that you start by speaking with your servicer about a refinance (if you are eligible for a HARP mortgage) or a loan modification, that will allow you to lengthen your loan to more affordable payments. You might also look into a credit counseling plan to help you manage your other debts.
For instance, if you have a non-recourse loan, working to negotiate a short sale or walking away from the home may make sense. Other factors to consider are: what your HARP mortgage payment will be, what rents in your area are, would you be happy renting until your credit improved (should you walk away or do a short sale) enough to buy another home.
What you suggest would place the investor of the old loan at a disadvantage to the new investor.