Sell Property, Lose Credit?
Short sales can hurt now, but they may help down the road
By Edward Jamison, founder, CreditCRM.com
In today’s market, homeowners
trying to sell their homes to avoid
foreclosure find themselves in a tough
spot. While many discover that they can’t
sell their home for their asking price, selling for a lower price won’t cover their outstanding loan.
Either a short sale or a deed in lieu of
foreclosure may be the answer for many
of these homeowners. What they may not
realize, however, is that these situations often result in the same credit-score drop as
foreclosures. As a mortgage broker, you can
advise your clients on why this is the case —
and why, depending on their situations,
short sales might be the best way to go.
Before advising on such things, however, mortgage brokers must understand
though the loan has a zero balance, it was
not paid in full according to the loan agreement’s original terms.
Further, short sales and deeds in lieu of
foreclosure are just as bad as foreclosures
when it comes to credit and credit scores.
All three are likely to remain on the credit
report for seven years.
responsibility. If repaying the loan in full
is impossible, repaying as much of it as
possible is the next best action they can
take. It’s also the ethical thing to do.
3. Potential lender omissions: Lenders
sometimes make mistakes and simply
report a zero balance with no mention of
settlement. Though unlikely, it happens
“In the past, homeowners were taxed on
[the deficiency balance], but the Mortgage
Forgiveness Debt Relief Act of 2007 now excludes
short-sale-deficiency balances as
taxable income through 2009.”
Edward Jamison is a
credit attorney and founder
of CreditCRM.com, which
is a business-in-a-box system for opening your own
credit-restoration business in-house. He can be
reached at (310) 268-0580, ext. 103, or via
e-mail at firstname.lastname@example.org.
the difference between deeds in lieu of
foreclosure and short sales.
■ Deeds in lieu of foreclosure: These occur when mortgage-holders agree to move
rather than going through foreclosure.
■ Short sales: These take place when mortgage lenders agree to accept less than the full
loan amount outstanding.
Lenders often view short sales as the
more-desirable choice because homeowners
attempt to sell their home and pay off their
debt, rather than just walking away. For example, if someone owes $100,000 on their
home and can sell it for $75,000, the lender
could agree to accept the offer, forgive the
outstanding $25,000 and take the loss. This
difference is called a deficiency balance. In
the past, homeowners were taxed on it, but
the Mortgage Forgiveness Debt Relief Act
of 2007 now excludes short-sale-deficiency
balances as taxable income through 2009.
The impact on credit
Credit-scoring models view all settlements
as negative indicators. And short sales are
considered settlements. The lender will report that the account was settled for less
than the full loan amount. That is, even
Because there are so many variables used
when calculating credit scores, it’s difficult to
pinpoint exactly how much a score will drop.
As an educated guess, however, the effect of
these situations can range from 20 points
if the person had a credit score of 500 before the event to more than 150 points if the
initial credit score was greater than 720.
more often than most people think. If your
client is one of the lucky few to whom it
does happen, the credit score won’t be
adversely affected — it may even increase
because the loan was paid off.
■ ■ ■
3 reasons to proceed
Although short sales can hurt credit scores,
they may benefit some homeowners. Here
are three ways a short sale can help your
1. Flexible lender policies: Certainly,
credit scores affect someone’s ability to
qualify for a loan. In the mortgage world,
however, there is still some flexibility
when it comes to underwriting. The next
time borrowers with a short sale seek a
mortgage, they may find that attempting
to satisfy their previous mortgage obligation instead of walking away from it works
to their favor and serves as the difference
between being approved or denied.
2. Personalresponsibility: Fundamentally,
borrowers are liable for the decisions they
make and the loans they sign. Whether
they’re in a bad mortgage loan because of
market changes or because they made a
poor choice, they have to bear some of the
Mortgage brokers with clients facing foreclosure must be well-versed on the difference between short sales and deeds in lieu
of foreclosure. They should also understand
the effects on clients’ credit scores and how
each client’s situation is different.
By making an effort to help clients
navigate their difficult time, brokers will
further establish their position as trusted
advisers and increase their likelihood of receiving future business. Moreover, helping
borrowers through the tough times is —
much like making a best effort at a short
sale — the ethical thing to do.
by Edward Jamison
“Credit Bureaus: Breaking the Law?”
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