I think you all know by now that when I see an interesting article, I like to share it with you. I received this from The Mortgage Market of Delaware and found it quite informative.

Short Sale vs. Foreclosure

For years, credit experts and financial advisors have told people that a foreclosure is the worst possible course of action to take if they are behind on their mortgage payments or upside down in their mortgage. One of the alternatives homeowners have been offered is a short sale, which is when a bank or mortgage lender agrees to discount a loan balance due to an economic hardship that is usually related to the current real estate market climate and the individual borrower's financial situation. The homeowner sells the property for less than the outstanding balance and turns over the proceeds to the bank. Unfortunately, some of the characteristics of a short sale are changing in a way that can potentially hurt one's credit even worse than a foreclosure, and this is why:

It used to be that only homeowners facing a foreclosure had to worry about being sued for the deficiency amount on a foreclosed sale. Short sales had become a better option because lenders would consider the loan amount to be a paid settlement, and there would be no deficiency amount owed after the property was sold. However, lenders are becoming creative and adding some language to their short sales agreements that read something similar to this:

"Upon the bank's receipt of [the short sale amount] the bank will release the lien and charge off the remaining debt as a collectable balance. Our recovery department will be in contact with you to make arrangements on this balance. We will report the account to the credit bureaus as a charge off with a balance owed."

This type of verbiage leaves the homeowner open to judgments, liens, lawsuits, wage garnishments, and further damage to their credit score.

A foreclosure can hurt a homeowner's credit score by 100-150 points, in addition to points already lost due to late payments. A foreclosure can be reported on a credit report for 7 and a half years from the date of the first late payment.

When it comes to short sales, however, there is very little legal structure surrounding deficiency amounts. Many of the nation's top lenders are taking advantage of this vagueness to pursue lawsuits, liens, and judgments against homeowners who opt for a short sale. If the short sale is reported as a paid settlement or charge off, the item will remain on a credit report for 7 and a half years from the date of the first late payment and hurt the homeowners credit score between 50-150 points, not including the points lost due to late payments. However, if a judgment is filed to collect the deficiency amount, the judgment can remain on the credit report for 10-20 years, and depending on the state laws, can be renewed until paid in full.

Fannie Mae & Freddie Mac both have a waiting period of 2 years before someone can buy another home after short selling a previous home. However, if a judgment is filed for a deficiency balance, the balance must be paid in full prior to loan approval because it can become a lien on the new house.

In conclusion, we must educate our sellers and buyers to find out what their options are and NEVER agree to the short sale agreement language quoted above. The good news is that legislation has not caught up with the short sale phenomenon, and as a result, homeowners still have the opportunity to negotiate credit reporting with their lender.

Hope you enjoyed reading this as much as I did.

See you next week!

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