How Does a Short Sale Affect Your Credit?

How Does a Short Sale Affect Your Credit?

We are frequently asked this question. A Short Sale is when you and the Bank holding the mortgage sell the home for less than the amount owed. The credit score of the seller will take a bigger hit by going through foreclosure or giving a deed-in-lieu of foreclosure than with a short sale. The consensus is that a short sale may result in a loss of about 80 - 150 points on the borrowers FICO score. A foreclosure or deed-in-lieu of foreclosure may result in a lost of 250 - 280 points of more.

Also to be considered is how long a borrower must wait before they buy another home. A foreclosure may force the borrower to wait as little as 36 months to 7 years before they can comfortably buy again. However, with a short sale, the borrower can buy again in about 18 months.

Not all lenders will negotiate a short sale, you will need to write a "letter of hardship" to the bank and if you have a first mortgage and a second, both lenders will have to agree to the 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.

Catherine Coy, a mortgage broker in southern California, agrees. "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.

If you are considering a short sale here are some key points you will need:

• Seller must obtain a short sale packet from the lender through "Loss Mitigation" Dept. The packet structures an agreement in the event of Short Sale is feasible.
• Seller must provide: W-2 forms, bank statements (90 days), 2 year tax returns, handwritten letter of hardship. (The more tears a seller can provoke from a lender, the better the result!)
• Seller must prove insolvency and typically have stopped making payments on the loan.
• If all the above are in place: Contact a Realtor to start the listing of your home. Remember: Closing dates are a fantasy. The national average is over 60 days and have taken three to four months. The bank could still forclose on the home even while a short sale offer is in process.
• Delays by the lender may require that new offers be submitted anyway and the lender reserves the right to accept other offers.

A Broker Price Opinion(CMA) will assist the lender in making a decision.

Factors for lender consideration in accepting a short sale:

• Amount recovered (Short Sale vs Forclosure)
• Money tied up during forclosure
• Percentage of non performing loans in portfolio
• Price offered by prospective buyer
• Willing to close in shorter period
• Amount of down payment by buyer
• May be rejected if loan is less than a year old