Short Sale Effects on Your Credit Score
Homeowners facing foreclosure may wonder if a short sale is a viable option for them. After all, a foreclosure and a short sale both involve giving up your home. Still, a short sale is very different from a foreclosure. A short sale involves the sale of your home, whereas a foreclosure involves the lender repossessing your home. In addition, the transactions have very different effects to your credit score.
Other People Are Reading
-
Identification
-
A short sale occurs when a lender agrees to take less than the total amount owed on a home because the seller does not have enough equity in the home to meet the mortgage obligation. Many times this is due to falling home prices. The lender may also agree to a short sale because a foreclosure is impending because a homeowner is experiencing a hardship and has fallen behind on mortgage payments. Not all lenders are willing to agree to a short sale. The lender decides on a case-by-case basis. So, it is important for the homeowner to return required documentation requested by the lender on a timely basis. Although some lenders will agree to do short sales for homeowners who are current, most lenders are more likely to negotiate with homeowners when their payments are behind.
Advantages
-
A short sale has a less negative effect to your credit score than a foreclosure or deed-in-lieu of foreclosure. According to American Foreclosure Specialists, your FICO score will generally be lowered an average 80 points with a short sale. With a foreclosure or a deed-in-lieu, your FICO score will more likely drop around 250 points. In addition, a foreclosure will stay on your credit report for seven years. With a short sale, depending on how the deal is negotiated, the homeowner’s credit report will essentially only show the late payments on the mortgage. Furthermore, the Mortgage Debt Relief Act of 2007 excludes the discharged debt from being included in a homeowner’s income, so the homeowner is not liable for taxes on the debt. This stipulation is for discharged debt forgiven in years 2007 to 2012.
-
Details
-
There are many documents needed to do a short sale. Contact the loss mitigation department of your mortgage company to get a list of the required documents. The mortgage company will want to know your financial status, so you will need to fill out documents stating your debts and income, as well as your assets. In addition, you will be required to provide copies of items such as tax statements, W-2s and bank statements. You will also need to write a hardship letter detailing the reasons you have fallen behind on your payments. It is usually in your best interest to work with a real estate agent on a short sale, so your property can receive more exposure and marketing and be sold in a timely manner. In addition, by working with a real estate agent, you can authorize the agent to be the point of contact between you and the mortgage company, thus essentially having the agent handle the transaction.
Considerations
-
Approval of a short sale occurs, in most instances, when a homeowner defaults and the lender issues a notice of default. Be prepared to gather pertinent financial information to submit to the lender. In addition, consider using professionals such as a real estate agent to help you manage this process because it can be complex. Also, a real estate agent can help you locate buyers who are willing to participate in a short sale transaction.
Warnings/Tips
-
Some buyers 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. You are not obligated to take a low-ball offer just because you are doing a short sale. Your lender will decide whether the offer is acceptable or not. Get the best offer you can, so the lender will not have a reason to reject it. This is another area where an agent can be helpful.
-
