A short sale occurs when a lender is willing to accept less than the full mortgage pay off. Think of it a pre-foreclosure sale to save you from foreclosure. But how does a short sale affect your credit?
MortgageNewDaily.com gives this example:
“Say the homeowner owes $100,000 on the property, but the lender only gets $70,000 from the (short) sale. The lender can then sue the homeowner for the $30,000 difference. But, the homeowner won’t have the $30,000. If he did, he most likely wouldn’t have gone into foreclosure in the first place. If the lender chooses to sue, and the homeowner cannot pay, a deficiency judgment would appear on the homeowner’s credit report, negatively affecting the homeowner’s credit.
(Note: When I negotiate a short sale for my clients I ask the lender to waive their right to a deficiency judgment.)
“Often, the bank chooses not to sue, but to take the loss as a tax write-off. In this case, there would be no deficiency judgment on the homeowner’s credit report; however, there is another implication. The $30,000 that the homeowner did not have to pay would be considered by the IRS to be income. The lender will send a 1099 to the homeowner at the end of the year, and the homeowner will be required to pay taxes on that $30,000. Even when the bank chooses not to sue, the foreclosure can end up showing up in credit checks because it is a public record.”
The credit score of the seller will take a bigger hit by going through foreclosure or giving a deed-in-lieu of foreclosure than with a short sale. In fact, a short sale may result in a loss of about 100 points on the borrowers FICO score. A foreclosure or deed-in-lieu of foreclosure may result in a lost of 250 points of more.
Most people, when faced with the possibility of foreclosure, find a short sale to be a better solution. I always recommend that the homeowner discuss their situation with their attorney and their accountant.
(Copyright © 2007 By Dan Forbes, All Rights Reserved.)
