Bill Morris: Short sale ... credit impact

Short sale ... credit impact

RISMedia published a very good article yesterday about a misunderstood aspect of dealing with distressed properties:

Will a Short Sale Save Your Credit?

I have seen ads and heard real estate agents suggest that a short sale will prevent the damage to the homeowner's credit standing that foreclosure would cause.  Not true.

As the article points out, whether a homeowner completes a short sale or loses a home through foreclosure, the mortgage lender ends up collecting less than the mortgage contract called for.  Under no circumstances is this a "positive" on the borrower's credit report, and it will impact credit scores.

In many cases, the impact of a short sale may not last as long as a foreclosure would, but even that depends on the borrower's mortgage payment performance before the short sale, other write-off or collection accounts, renewed performance after the short sale, and many other factors that the industry considers risk indicators.

"Beware the Web ...," the article says, and that's good advice in many areas of life.  There is a wealth of information available on the Internet, but distinguishing reliable information from bad (or just oversimplified) advice is often impossible. 

If you're struggling with a mortgage and considering your alternatives, the best advice is to begin communicating as early as possible with your lender and with financial and real estate professionals.  Just assuming that there's nothing you can do is clearly a road to the worst outcome.  Getting good advice early will give you the best chance of resolving a very bad situation as well as possible.

Bill F. Morris, ABR, CRS, CDPE, e-PRO, MBA
RE/MAX Capital City
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Comment balloon 5 commentsBill Morris • June 12 2010 07:48PM

Comments

Hey Bill. Good post to clear up all the confusion associated with a short sale.

I was just citing some quotes on a post earlier, from the Zan Monore seminar we attending in San Antonio early last year. Good to see you on AR

Posted by Scott Hayes, Realty Austin, Broker Associate ((512) 786-8300) over 9 years ago

"I have seen ads and heard real estate agents suggest that a short sale will prevent the damage to the homeowner's credit standing that foreclosure would cause.  Not true."

As with most things, this statement needs some disclaimers.  Yes, many people mistakenly lead sellers to believe that doing a short sale will not have a major impact on them.  That is false.  A short sale will negatively impact the seller's credit.  The severity though depends on how late the mortgage is prior to the short sale completion.  If the seller is only 30 or 60 days late on their mortgage when the short sale is completed, that will in fact, have less of an impact than if it hit 120+ days with the property going into foreclosure. 

When getting a new mortgage, Fannie Mae will let someone who completed a short sale or pre-foreclosure purchase in a shorter time period that someone with a previous foreclosure. This is the motivation for the seller being proactive to prevent an actual foreclosure.

Posted by Rodney Mason, AL, GA, SC, & TN (Guaranteed Rate) over 9 years ago

Bill, I agree we all need to be cautious about what we are telling people.  However, on pitfall of a foreclosure vs. a short sale is security clearance for credit restricted jobs

Posted by Denise J. Storm, Broker Associate - Durango Colorado Mountain Homes (Re/Max Pinnacle) over 9 years ago

Bill, good advice to suggest sellers start sooner rather than later (or give up entirely). 

Posted by Lynn Krogseng (Keller Williams Premier Partners) over 9 years ago

Denise, you're absolutely right about foreclosure preventing many/most security clearances.  Some employers are doing pre-employment credit checks for other types of jobs, too, and foreclosure can be a show-stopper.

Scott, it's good to hear from you.  I was in another Zan Monroe seminar a few weeks ago on absorption-rate pricing.  Very good information, and Zan is always entertaining.  Hope you're doing great.

Posted by Bill Morris, ABR, CRS, CDPE, ePRO, MBA (RE/MAX Capital City) over 9 years ago

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