Foreclosure Credit Effects | Columbus Homes For Sale

Foreclosure and Short Sale Credit Effects

Sellers may wonder whether letting a property go into foreclosure would be easier and smarter than going through a short

sale. With a

foreclosure, and depending on state laws regarding foreclosure, a seller could 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.

Basics of a Short Sale

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

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. Doing a

short sale is not

for the faint of heart.

How is the Seller's Credit Affected?

According to David Steep, division manager at Vitek Mortgage, Sacramento sellers, as well as sellers in other states, will take as

big a hit on

their credit report by going through foreclosure as giving the lender a deed-in-lieu of foreclosure, providing you are

more than 30 days in

arrears. Steep says the points lost on a FICO score are as follows:

Foreclosure or Deed-in-Lieu of Foreclosure

Both of these solutions affect credit the same. Sellers will take a hit of 200 to 300 points, depending on overall condition of

credit. This

means

if a seller's FICO score before foreclosure was 680, it could dip as low as 380.

Short Sale

The effect of a short sale (providing the sellers are more than 59 days late) on a seller's credit report is identical to that of a

foreclosure. The

ding on credit will show up as a pre-foreclosure in redemption status, Steep says, which will result in a loss of

200 to 300 points. This means

short sale with a previous FICO of 720 will see it fall from 520 to 420.

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, speaking about borrowers who are a few

months in arrears. Some agents

say

the good news for short sale sellers is the wait is much shorter before buying another

home, and new Fannie Mae guidelines make that a

true

statement.

Waiting Period Before Buying Another Home

Can a seller buy again under two years? Partially true, says Coy, "It's an utter myth that a consumer 'can buy again in about 18

months at a

good interest rate.' However, new Fannie Mae guidelines now require only 24 months' seasoning, and that's good

news for agents who

specialize in short sales."

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

and had no 60-day late pays or greater on record.

Foreclosure or Deed-in-Lieu of Foreclosure

Steep says a seller who wants to buy another home after foreclosure will end up waiting about 24 to 72 months before a lender

will offer any

kind of interest rate that makes sense.

Coy says, "The good news is a short sale will allow the consumer to obtain an institutional loan for a new home within two

years".

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

general, a trustee's sale wipes out the right to a deficiency, except for certain junior lien holder conditions. In California,

purchase money

loans

are not subject to deficiency judgments; however, some hard money loans, equity loans and refinances

are, providing certain

conditions apply.

Some other states have laws regarding personal guarantees, which could also result in a

deficiency judgment, if the home

owner is held

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 a deficiency judgment, talk to a real estate lawyer.

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, if you've fallen behind in your payments. Coy says that according to

"Score Factor Code #22, there's

no credit score advantage for a delinquent borrower on a short sale over a foreclosure." The

only advantage is being able to buy another

home

within two years over the three- to five-year period required for

foreclosures. But seek legal and tax advice before making that

decision.

Call The Anders Team at (614) 527-0811

Let us chat and review your situation, we can assist with a "short sale."

Credit Effects

The Anders Team
614-527-0811

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