May
10
What’s More Damaging To Your Credit: A Short Sale Or A Foreclosure?
Posted by justin_lee | Posted in Uncategorized | Posted on 10-05-2009
Interesting Q&A I just read on CNN Money. Actually, more than interesting, it’s great information to have with you the next time you’re on an appointment with a homeowner, who doesn’t want to do a short sale.
You can print out this article from a reputable 3rd party (CNN) and use this to help you get more short sale deals.
Please leave a comment. I would love to hear if this helps you pick up any more deals.
I’m going to test it out and I’ll let you know how it turns out.
Happy Investing,
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SECURE & CONFIDENTIAL
What’s More Damaging, Foreclosure Vs. Short Sale? A short sale is when a lender, investor or an attorney accepts an offer from a buyer who offers less money than the home loan is worth, as opposed to the home going to a trustee sale. A trustee sale is when your home is put up for auction. You want to avoid being foreclosed upon and going to a trustee sale. If your home is auctioned off, not only will you lose your home, but you will also get a debilitation mark on your credit score. A short sale works something like this. Say, for example, a person has $600,000 in debt on their house and they have $590,000 in morta=gages. $90,000 of it is a second loan, where the lien holder will accept ten percent in repayment and then go away. The remaining $500,000 of debt remains, and the buyer has made an offer of $380,000. The second lien holder will get ten percent in a short sale, and the first lien holder will usually receive at least 50% or more. In order to do this you need to be able to prove that you can’t do various other things first. There is a lot of paperwork involved and a lot of time. Short sales also have an adverse affect on the local real estate values. If a home valued at $600,000 is sold in a short sale for $380,000, then the buyer(s) turns around and sells it for $450,000. This negatively affects the resale value of all the homes in the neighborhood. Short sales are harmful to our economy. So, unless the homeowner have contacted his/her lender(s) as soon as possible, before the situation get worst, to postpone a few payments and decrease the amount due until he/she is able to find another job, I will say that SHORT SALE is less damaging to your credit. Every state has laws specific to their region about unemployment and foreclosure. This law may work in your favor by granting you 6 months to resume paying your mortgage. How’s that for a comment?
The article responded to the actual question - impact on credit - but did not go on to include what I consider a very important factor. In a short sale the negotiation should include the complete release of obligation for the borrower. If the property goes to foreclosure auction, the lender is still able to seek a deficiency judgement against the borrower for their losses.
Great point Elsie.
A lot of homeowners get worried about the deficiency judgment when the topic of short sales come up.
What many don’t realize is that a deficiency judgment is all but guaranteed if they just let the home go to auction.
Working with a smart investor, who can negotiate the release of such judgment, is the best way to go for them.
This guy is an IDIOT!!! I have no idea how he could run a web site about credit and be so stupid? My team has been successfully doing short sales for more than 3 years, since before they were the new “in” thing, and since I went through a bankruptcy and lost 14 of my own properties). What this idiot says is just WRONG!!! Short sales very rarely effect your credit like a foreclosure, particularly if you negotiate for same. For some homeowners, it has NO BEARING, NO LATES ARE REPORTED AND THEIR CREDIT STAYS AS-IS…..a note, remember, most of these clowns write articles to sell papers, NOT to reprot what REALLY happens.
All my best to those venturing into the short sale business.
Sincerely,
Ben Benita
BBenita@United-IG.com
Wow Ben!
Why don’t you tell us how you really feel?
In all seriousness, I agree with you. I can’t ever imagine a short sale damaging your credit as much as a foreclosure, but then again, I don’t work in the credit bureaus, nor do I know exactly how the bureaus generate our credit scores.
Maybe I’ll try and get John Ulzheimer to reply or explain his comment in more detail.
Stay tuned, and I’ll let you know if we have any success contacting him.
A short sale is reported to the credit bureaus as either a charge off or a settlement. Regardless, each has the same impact to your score as a foreclosure. You’re welcome to ask FICO the same question if you like…once you calm down.
I’ve just posted a more extensive explanation of WHY they’re treated the same way at my blog site…
http://www.creditbloggers.com
John Ulzheimer
Sorry, I get riled up when I see what I believe to be untruths. The point of your article was comparing a short sale to a foreclosure. The BIG benefit when comparing the two is that a short sale CAN BE NEGOTIATED, a foreclosure can not, it goes on and stays on for 7 years, take it or leave it. Further, I have NEVER seen a foreclosure have NO BEARING on a credit report, Conversely, I have seen short sales have little to no effect on a credit report. It seems to depend on the lender, how, and what is reported, both of which can be successfully negotiatied with a good short sale company (I am of course biased toward us). Conclusion — from me — short sale is better, ALWAYS. According to what I read on your article, a short sale is almost equal to a foreclosure…I just don’t agree!!!! If that were in fact true, why would a homeowner EVER do a short sale? If the NET credit effect is the same, and, lenders are offering CASH FOR KEYS after a foreclosure auction, the decision is a no brainer. Stay in the home as long as possible, then, GET PAID TO MOVE OUT!!! I will venture over to check out your blog….
Come on John, did you read the whole CNN Money article? I have seen other stuff by Gerri and seldom agree with him as well. Taken directly from his article: “That said, if you’re underwater on your mortgage and you need to move, a short sale is a better option than foreclosure. Going through foreclosure will make it very difficult for you to get a loan for at least three to five years; if you’ve done a short sale, you may be able to qualify for a new mortgage within two years.” Uh, if I can qualify sooner with a short sale, it would lead me to ASSUME a short sale has less adverse effects on my credit. I went through a personal bankruptcy a little more than 3 years ago, reason I got into short sales was to help others, and, I can get a house now. My personal opinion, not that anyone asked, credit is WAY over-rated!!! I am tired and it is late….Cheap plug for our web site — http://www.United-IG.com.
Well, after reading further comments posted here, I have to say the issue got heated here. LOL Without thinking outside of the box, this issue applies differently to each particular situation. Applying the formula Fair Isaac Corp.(FIC), the company that created the most widely used credit score formula called FICO, by either of the top credit bureaus, they categorize ‘FORECLOSURE’ as a more negatively socoring factor when compared with a SHORT SALE. Now, you can easily feel free to contact any of the top credit bureaus and find out for yourselves what impacts the most when reaching towards a credit score. I will guarantee you that 3 out of 3 will say FORECLOSURE. It’s a discretionary rule of thumb applied by the credit bureaus when reaching individual’s credit score and applying the FICO formula. By the way, this comment is not for discussion. I just wanted to share further abount the issue of FORECLOSURE v. SHORT SALES. I care less what others might think, say or feel. So don’t take it personal.
[...] away” on the numerous advantages of a short sale over this strategy. I actually wrote a blog post about this about a year ago, that you can read [...]