Affect on Your Credit

August 19, 2010: Both a Foreclosure and Short Sale are going to hurt you in many ways, but there is a significant benefit to Short Sales over Foreclosures. I will discuss specifically the effect on your credit a short sale has and how it is reported different than a foreclosure.

I will give you a breakdown below of the things that effect your Credit, Taxes, and Employment, but remember these are just raw facts. It does not take the human element into account. Besides all the good reasons that I will talk about to go with a short sale over a foreclosure, keep in mind your sanity and that of your family.

The biggest difference between a short sale and foreclosure are that YOU HAVE CONTROL in a short sale. With a Foreclosure, THE BANK HAS THE CONTROL!

Here is the good, bad and ugly. Also, remember to speak to your Attorney or CPA before you do anything. These facts below can change and because we are talking about taxes there are lots of factors that can change. There are some circumstances that would make a foreclosure or Bankruptcy a better option. What I am saying is do your homework.

Credit Score

Short Sale- The credit bureaus such as Equifax, Experian and Transunion report short sales as settled for less than the balance as opposed to paid in full status. There are rumors out there that a Short Sale will only hit you by as little as 50 Points. I read this a lot and it’s not true. Just ask yourself if that makes sense. Even if you make every payment and never fall behind when you short sale (which you can do now) it will still be affected by more than 50 points.

I have completed many short sales here in Santa Clarita and here is the typical scenario. When I get the initial call from the homeowner, they are usually at least 2 months behind with the 3rd mortgage payment coming soon. They have read everything about the NOD (Notice of Default) coming after they miss their 3rd payment and are starting to get nervous. By the time the Short Sale Process is over they are usually behind 6 to7 months. The missed mortgage payments alone are going to just kill your credit.

I don’t know why people try to tell folks that the credit is less damaged (from a numbers standpoint) with a short sale. Probably a sales tactic. The benefit is not in the Credit Score when it comes to Short Sales but the Credit History and how that is reported. That is where the true difference is.

When you short Sale your home you show that you were responsible and took action instead of giving up and giving the middle finger to the banks. Really, that’s how it seems to them. The main reason is that the banks lose around 20% more when they have to foreclose. When you Short Sale you can buy as soon as 3 years after the completion of your short sale. It will be sooner down the road when they realize that they need to sell homes to people who were once homeowners to get rid of all the homes on the market.

It is going to get to the point where more than 50% of the homeowners nationwide have either had to short sale their home or were foreclosed on. There will be programs for folks who used a short sale to purchase right away down the road. There is no way all of those affected can be kept out of the marketplace and think we will see any type of recovery.

Foreclosure-

Did you notice just above I said “Foreclosed on?” I wanted to point out here that that is exactly what happens. You are not in charge and the bank “forecloses on you.” You have a total loss of control at that point and I believe that is what makes it worse than it has to be.

A foreclosure hurts you credit wise in much the same fashion as a bankruptcy. In fact it pretty much just bottoms out your credit. Does it really matter if its 300 of 400 points at this point. No. The Foreclosure will be reported for 7-10 years just like a bankruptcy in most cases. When you go to apply for a loan, one of the questions is have you had a foreclosure in the last 7 years. When the broker goes to find you a loan, most banks will not accepts folks with a foreclosure on their recent record.

You can tell that I am very pro-short sale and I am. Even if you are going to do a bankruptcy you can still do a short sale.

You can forget about all the “Good” reasons to short sale. The only TRUE reason you should short sale is to be in control. Get a little piece of control and thinks will start to look up.

This article was reprinted from Santa Clarita Short Sale Center.

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