Will Short Sale Affect My Credit?...

Homeowners who cannot pay the mortgage may be desperate to get rid of their obligation. Depending on their situation they may have a few options available to them: refinance, loan modification, short sale, foreclosure or bankruptcy.



Lenders report these transactions to credit bureaus. In many cases, a mortgage solution significantly damages the borrower's credit score, also known as the FICO score.



"The single worst thing any person can do to her FICO score is to have a serious delinquency such as foreclosure or bankruptcy appear on her credit bureau report," says Craig Watts, public relations director for FICO, which developed the FICO score.



Damaged credit can make life miserable for borrowers, making it more difficult to secure a future mortgage or other loan, rent an apartment or even get a job.



A mortgage solution's potential to damage a credit score depends on a borrower's individual financial circumstances and past credit history.



Foreclosure and bankruptcy. A foreclosure can make a significant negative impact on a borrower's score.



I've seen as much as a 300-point drop in the FICO scores of clients who have a foreclosure listed on their credit reports.



A foreclosure will remain on a credit report for seven years, according to FICO's myFICO Web site. However, a FICO score may begin to rebound in as little as two years if the borrower keeps all other credit obligations in good standing, according to the site.



According to the Web site, "The important thing to keep in mind is that a foreclosure is a single negative item, and if you keep this item isolated, it will be much less damaging to your FICO score than if you had a foreclosure in addition to defaulting on other credit obligations."



Some homeowners who face foreclosure may turn to the bankruptcy process for help. According to the National Consumer Law Center in Boston, a bankruptcy may make it possible to stop the foreclosure process, allowing borrowers to catch up on missed payments.



Travis Hamel Olsen, president of the National Short Sale Center in Scottsdale, Ariz., says borrowers also can use bankruptcy to discharge other debts, freeing up money for the monthly mortgage payment.



However, the reality is that in many cases, a bankruptcy just buys time until the homeowner defaults again on the loan, Olsen says.



In addition, a bankruptcy may have a greater negative impact on a borrower's FICO score than a foreclosure, according to the myFICO Web site."While a foreclosure is a single account that you default on, declaring bankruptcy has the opportunity to affect multiple accounts and therefore has potential to have a greater negative impact on your FICO score," the site says.



A bankruptcy remains on a credit report for seven to 10 years, depending on the nature of the bankruptcy.



Short sales and other alternatives. Bankruptcy is not the only alternative to foreclosure. A substitute is a short sale, which occurs when a lender agrees to allow a homeowner to sell a property for less than what the owner still owes on the mortgage.



A deed in lieu of a foreclosure is another alternative. It occurs when homeowners deed their home to the bank without going through the extra time and cost of a lengthy foreclosure process.



Homeowners can only qualify for a deed in lieu of foreclosure if they have just one mortgage or if they have multiple liens from the same lender.



Some people believe a short sale or deed in lieu of a foreclosure is less damaging to their credit score than a traditional foreclosure. However, that's not the case, according to the myFICO Web site.



According to a Q&A on the site, "Credit bureau reports are limited in how they represent foreclosures today, so it's generally not possible to tell from the credit report if a reported foreclosure is a short sale, deed in lieu of foreclosure, settled account, regular foreclosure or some other variation."



The site goes on to state that foreclosures and their alternatives are all treated as "serious delinquencies" on acredit report and that the alternatives "will be considered no better or worse for your FICO score" than foreclosures.



However, one advantage of a short sale is that as part of sale negotiations, homeowners can ask the lender to report to the credit bureaus that the mortgage has been paid in full.



A lot depends on how the bank reports a short sale. Most often, it will be reported as a 'settled debt' but it can even be listed as 'paid in full' by some lenders.



Even if the borrower can win this concession, some credit damage may already have occurred in the months leading up to the short sale, says Jacob Benaroya, president and managing partner of the Biltmore Capital Group, buyers and sellers of nonperforming mortgage loans based in Rochelle Park, N.J.



"The lender is likely to have reported late or missing payments to the credit bureau, so homeowners may find that their credit score has been damaged significantly even before a short sale takes place," Benaroya says.



Two other techniques often used to stave off foreclosures - loan modifications and refinances - may actually boost a borrower's credit score, Benaroya says.



"In general, a refinance or loan modification will have a favorable impact on someone's credit score because the amount of their monthly debt obligation is often lower," Benaroya says. "The overall debt can be lower, too, if the lender has forgiven some of the principal on the mortgage. In addition, paying the new mortgage on time for six to 12 months helps begin the process of credit repair."



However, homeowners who make late or partial payments on their new loan modification or refinance will see these actions negatively affect their credit score. In addition, if the mortgage lender has forgiven some of the principal, this could be reported to the credit reporting agencies as "debt satisfied for less than the full amount," which could also negatively affect the borrower's credit score, says Ralph Roberts, a real estate author and host of the KeepMyHouse.com Web site.



Other factorsOther factors - such as court judgments - associated with mortgage solutions also can negatively affect a borrower's credit score.



A court judgment posted to a person's credit report will almost always negatively impact her FICO score. For example, in some foreclosures and short sales, a lender may obtain a deficiency judgment against a homeowner. A deficiency judgment obtained by a creditor in court can be used to force borrowers to pay the difference between the amount of money collected in a short sale - or a sale after a foreclosure - and the outstanding balance of the mortgage.



Some people mistakenly think deficiency judgments do not apply to foreclosures. Foreclosure laws vary by state, but consumers should be aware of the possibility of a deficiency judgment at any time up to the statute of limitations after a foreclosure.



People think they don't want to do a short sale because they may owe money later, but they need to understand that (a deficiency judgment) could be an issue with a foreclosure, too.



To avoid a deficiency judgment related to a short sale, borrowers should be careful to have a written agreement from the lender that says the sale represents a "total satisfaction of debt".



Marc R. Tow

Real Estate and Bankruptcy attorney for 30 years.

Mortgage Broker for 20 years.

I have been in business this long because I actually think about for my clients.

Consultations are on the house.

Call today (949)467-1404. Source: Www.Towlawbankruptcy.Com