Debt Kid » short sale

How Will A Short Sale Affect My Credit?

Scott Mitchell — Sat, 19 Jan 2008 03:16:55 +0000

A short sale will negatively affect your credit, but not nearly as much as a foreclosure or deed-in-lieu ~ read this entire article for details on each alternative.

A short sale simply means that the amount of the mortgage balance owed is greater than the current market value of your home. Homeowners who are in financial difficulties and facing foreclosure often opt for a short sale in order to escape the foreclosure process. This is precisely the situation now across the United States where the sub prime adjustable rate mortgage mess has caused mass foreclosures and significantly reduced the value of real estate.

A short sale takes place when the lender agrees to accept less than the amount you owe him on your mortgage because you don’t have enough equity to sell the home and pay all the costs of the sale. And make no mistake, the lender must agree or you’re out of luck.

the effect on your credit report

You will suffer much more damage to your credit report with a foreclosure than you will with a short sale. It will also take considerably longer to restore your credit rating once your financial difficulties are resolved. In general, here’s what happens:

For a Foreclosure or Deed-In-Lieu of Foreclosure

- Expect about the same things to take place. Quite often this means a loss of between 200-280 points on your FICO score. A pre-foreclosure FICO of 675 could drop to as low as 395, essentially eliminating you from future credit approvals. It may be as long as three years before you can qualify for another home loan.

For a Short Sale

- Expect to suffer some credit score damage, but nowhere near as much. Loss of FICO points will be around 75-125 and your report will show it listed as a ‘pre-foreclosure in redemption’ which is far less negative. You will most probably be able to secure a new home loan in about a year and a half.

In any case, it is a good idea to consult with a lawyer, tax accountant (CPA) or a good real estate agent who is experienced with short sales. These professional may charge you a bit for their services, but failing to have the right counsel could end up costing you a sizable bundle. So don’t consider going it alone. Get the help you need.

Know Where You’re At

NOTICE: Don’t get your credit score from anywhere else except myfico.com. They have real scores here, not the fako crap that many sites give you. These are the real deal.

You Need An Experienced Short Sale Agent!

From my blog here I’ve developed an extensive network of real estate agents that have short sale experience. If you’d like a referral, fill out the form below and I’ll have someone available in your area to help with your short sale ASAP.

Short Sale vs. Foreclosure: Which is the Better Option?

Scott Mitchell — Fri, 18 Jan 2008 03:12:48 +0000

Losing your home to foreclosure due to an inability to keep up with your monthly mortgage payments is one of life’s most unpleasant experiences. It is also an event that keeps on affecting you long after your home is history by devastating your credit score. Regrettably, most people cannot be 100% sure that they will remain safe from foreclosure because they can’t foresee the unexpected. Occurrences such as serious illness, a major accident, divorce or job loss can happen to anyone. So it’s a good idea to understand the available alternatives should the worst occur.

Of all available options, foreclosure is the worst

The inevitable result of a foreclosure is the lender taking your house. Not only will you lose your house, but the lender can get a judgment against you for the arrearages you owe plus his costs for the foreclosure action. If that isn’t enough, your credit report will be in terminal condition for many years to come, worsening an already bad financial situation and making it very difficult to obtain any other kind of credit. There is no upside to foreclosure. It should be avoided at all costs.

Consider a short sale when foreclosure seems inevitable

A short sale is a popular option for homeowners mired down with financial problems. In this case, you would sell your home for less than what you owe your lender; the biggest problem you will face is getting your lender to agree to a short sale. In many situations, they will not. Experts advise pursuing this option the minute you realize that you are falling behind in your payments and most likely won’t be able to catch up. The longer you wait and the greater the amount you are in arrears, the less likely it becomes that your lender will even be willing to discuss a short sale.

Short sales have disadvantages too

While a short sale will save you from foreclosure, it will also have a negative effect on your credit score, frequently lowering it by as much as 200 points. This can be overcome more quickly than the black mark of a foreclosure, especially if you manage to retain one or two credit cards and keep them current. Perhaps equally distressing, the Internal Revenue Service frequently deemed the difference between the mortgage balance and the amount realized from the short sale to be taxable as income despite the fact that the debtor never saw a dime of it. There is new federal legislation called the Mortgage Forgiveness Debt Relief Act 0f 2007 that just went into effect on January 1st, 2008. The new act essentially eliminates this problem.

Almost any option is better than foreclosure

Simply stated, do everything you can before foreclosure occurs and do it as quickly as humanly possible. Don’t sit back and keep thinking, “What can I do?” Instead, consider that short sale and check with your lender before your options become more limited.

Best Tip I Can Give You: Don’t Do This Alone

I successfully short sold my house, and the single biggest reason was my real estate agent. Having someone who could work on my behalf was incredible. Facing foreclosure is a scary thing, I know, I was about a month away from losing my home before I got my short sale done.

Don’t just get any real estate agent to help you! My agent had lots of short sale experience, and it made all the difference. He knew who to talk to, when to talk to them, and how to handle all the paperwork to get the deal done.

You Need An Experienced Short Sale Agent!

Short Sale vs. Deed-in-Lieu: What’s Your Best Choice?

Scott Mitchell — Thu, 17 Jan 2008 00:24:51 +0000

Homeowners facing foreclosure often have the option of selecting a short sale or a deed-in-lieu of foreclosure as a possible solution to their financial difficulties. But are they? Which is the best choice? Like most alternatives, both have their upsides and their downsides. Understanding these options is the only way to make a truly informed decision.

In a short sale, your lender takes the loss

When you decide to use a short sale to prevent foreclosure, you should understand that the sale must have the lender’s approval and that lenders don’t always agree. What the lender is doing when he accepts, is permitting you to sell your home for less than you owe him and taking the loss himself. If he does go along with the short sale, it will relieve you of the burden (arrearages) as well as the cost, emotional strain and embarrassment of a messy foreclosure procedure. On the upside, a short sale is far less destructive to your credit rating than a foreclosure, as it is supposed to be listed as a “settled debt” on your credit report. However, it is still harmful to your credit score and can reduce it by 200 points or more.

On the downside, the lender could always go after you to collect the difference between the short sale price and what you owed him by getting a deficiency judgment against you. However, more often than not, this doesn’t happen simply because he knows that there is no money to recover and that he will have to pay all the costs of the legal action.

deed-in-lieu may be your fastest way out

A deed-in-lieu of foreclosure is when you give your home back to your lender, take your losses and thereby prevent the foreclosure. Lenders will frequently accept this because it is a less expensive and time consuming process for him than a full foreclosure action. The upside is that a deed-in- lieu is a faster solution than a short sale and that it is more likely to be acceptable to the lender. The ramifications to your credit score are about the same as the short sale.

On the downside, if the lender eventually sells the home for a price that doesn’t pay off the original mortgage amount, he can get a deficiency judgment and try to collect it from you. Once again, however, he knows that you can’t get blood out of a stone and probably won’t proceed if there doesn’t appear to be any money to recover.

Select either Short Sale or Deed-in-Lieu as early on as possible

The sooner you act on either a short sale or a deed-in-lieu the better. Once the foreclosure process is activated, you will not be in a strong position to negotiate with your lender because payment arrearages, interest and penalties have piled up. He can hold you financially responsible for his losses and seek a deficiency judgment that will appear on your credit report even if you don’t have the money to pay it. In either case, however, avoiding foreclosure is always a better choice in terms of the effect on your credit.

I successfully short sold my home. It was an easy process, but it beat having my home go to auction at foreclosure! Check out my guide to short selling a home before you do anything else!

You Need An Experienced Short Sale Agent!

What You Need To Know About Short Sale Tax Issues

Scott Mitchell — Tue, 15 Jan 2008 03:21:31 +0000

—–>Check out my post on how I successfully short sold my house<-----

Until this year, there were definite tax consequences from escaping foreclosure through a short sale. Avoiding foreclosure has always been the best thing to do since it prevents a black mark on your credit report that might keep you from being approved for future loans. Most financial experts will tell you that even today, keeping a foreclosure off your credit report is more important than any added tax liability.

First, consider the credit problems

Whether you are foreclosed or choose an option such as a short sale or a deed-in-lieu of foreclosure, you will have to deal with the tax man. And most real estate professionals will advise you that a short sale is your best option if preserving your credit is important. There are a number of potentially-costly consequences of foreclosure, deed-in-lieu of foreclosure and a short sale. Most of these are the impact on a debtor’s credit rating. The first two, foreclosure and deed-in-lieu, have about the same impact—reducing your FICO score by 200 points or more. With a short sale, this reduction is more in the order of 100 points. You can also expect it to be impossible to get a new loan for 36 months or more with the first two, and around18 months with a short sale. This means that you will be able to recover from the credit impact much faster with a short sale. Nevertheless, there will be credit consequences no matter which solution you select.

Mortgage Forgiveness Debt Relief Act of 2007

The new Mortgage Forgiveness Debt Relief Act of 2007 all but eliminates the extra financial ‘hit’ a debtor would take due to tax liabilities. It was first introduced in the House in September, 2007 and finally signed into law by President Bush on December 20th, 2007. Now, the act is law and is termed Public Law No. 110-142.

Prior to this year, a debtor would suffer the loss of his home, negative impact to his credit rating and additional debt arising from federal tax laws that made the difference between what the home sold for and what he owed on his mortgage, taxable as income. The only escape from this new financial liability was to file bankruptcy which, regrettably, makes one’s credit terminally ill.

Public Law No, 110-142 (H.R. 3648) amends the Internal Revenue Code of 1986 to exclude discharges of indebtedness on principal residences from gross income and for other purposes. It does not, however, apply to homes purchased for investment and subsequently rented out. It only applies to homes where the owner has been in residence.

There are some limitations under the new act

The new law also reduces the income tax breaks on most gains from the sales of non-primary residences based upon a formula that considers the amount of time that the taxpayer actually lived in the property during the five years preceding the sale. And it limits the excludable amount of the indebtedness to $2-million and forbids the inclusion of indebtedness arising from services performed for the lender. There are other benefits and penalties as well. Perhaps most important, however, the new law keeps insolvent homeowners form taking an additional financial beating on a 1099 IRS gift of their short sale or foreclosure which only bankruptcy could do until this year.

Full details on Public Law No. 110-142 (H.R. 3648) can be had by going to: http://www.govtrack.us/congress/bill.xpd?tab=summary.

You Need An Experienced Short Sale Agent!

Countrywide Short Sales – What You Need To Know

Scott Mitchell — Thu, 20 Sep 2007 11:42:59 +0000

Countrywide is the largest mortgage company in the US…think they are dealing with a short sale problem at the moment? You betcha. (not to mention short sales of their stock! Wish I had shorted them at $40!) They have now been taking over by Bank of America Mortgage.

Countrywide’s Full Spectrum Lending division was the King of awful sub prime mortgages the past few years, and now those loans are going bad. If you have a countrywide loan and are facing foreclosure, a short sale of your home might be your best option.

I did a short sale of my home (and I had a first and second mortgage on the property) earlier this year. It can be done, but it requires patience and a plan and a little help. There are a zillion schmucks out there who will offer to “help” you when your down. Some are legit, most are not.

What I Did In My Short Sale

What I did (hiring a real estate agent with short sale experience) worked for my situation. It may not for your short sale, but I found it the best option. Working with a real estate agent you at least can get a background on the person, and if they work for a larger brokerage you know they have resources to help you. Think short sales are hard for you? They are equally as hard on the real estate agent! Getting a short sale deal done (especially right now with the overwhelmed lenders like Countrywide) takes alot of work. I do think its the best option vs. foreclosure though. You can also read my 7 steps to a successful short sale guide.

Countrywide/BOA Speeding Up Short Sale Process

Having gone through a short sale of my home, I know how long and frustrating the process can be.

For homeowners with Countrywide loans, the process has been terrible.

It sounds like things are finally starting to change. I’m not sure if this has to do with the Bank of America takeover (likely), but according to two separate real estate sources I’ve talked to on the phone, Countrywide has beefed up their staffing for loss mitigation/short sales.

I’ve seen rumblings on my own posts from readers about short selling with countrywide about them finally stepping up and speeding up the approval process. Up to this point many people have been waiting sometimes 6 months to get approval from countrywide to short sell their home.

Madness, I say.

Glad to see things picking up. Short selling your home is a much better alternative for all parties involved than a foreclosure. I think people who short sell their home will have a much better time trying to buy again in the future vs. those who just walk away from the home. Obviously keeping current on payments is the hope but for many homeowners under water, a short sale is the best option.

If anyone else has news on Countrywide’s policy regarding short sales, please comment.

You Need An Experienced Short Sale Agent!

Notice of Default posted…my roomates know

Scott Mitchell — Thu, 12 Apr 2007 07:50:36 +0000

It happened. My roommates/friends/renters know about my housing situation. They talked with someone posting a “notice of default” note on my house. I thought this might happen, but I was hoping it could be avoided with short selling the house.

I just spent an hour with the roommate I am closest too explaining the whole mess. To be honest…

I feel ten times better that they know now.

Now that its out in the open, I can stop lying about why I am selling the house and be truthful with them.

It’s still really embarrassing.

I guess the guy posted the notice of default on a post outside my house, and then take a picture of it. My roommates talked to the guy and the poster advised them they should, “think about moving soon, this house is headed to foreclosure”. Great. Thanks notice of default poster man. Oh well. He’s just doing his job. I guess he crept up really creepy like to the house…probably gets yelled/shot at alot. Poor guy.
So, I’m going to write quick letter to my other two roommates to explain in short detail what has been going on and to apologize to them.

I also have some business work to do before I head off to bed…its 12:45 now, lets hope for a 2 to 3am bedtime.

Now that my roommates know, I’ll be telling my other closer friend soon. I wouldn’t want something to slip and for her to hear it from them.

This sucks, but I feel OK.

(2008 update)If you’re facing foreclosure, check out my post on how I short sold my house.