Short Sale versus Foreclosure

WHAT IS IT AND HOW DOES IT AFFECT YOUR CREDIT?


What does "short sale" mean? "A short sale in real estate occurs when the outstanding obligations(loans) against a property are greater than what the property can be sold for."

In this time of option-arms coming due, we will see more and more borrowers trying to negotiate short sales as opposed to going into foreclosure. In most cases, the borrower will be behind on payments and about to go into foreclosure, however they may not always be the case.

Some short sales are negotiated simply because a borrower knows he is upside down on his mortgage, but has not reached the point where he has late payments. In other words, he is in a loan let's say that is interest only and he has been unable to make principal payments. His original loan amount was $250000, but since he has been making interest only payments his loan now has a balance of $263000 and his home only appraises for the $250000 or possibly even less. Because the option-arm period is up, his mortgage payments are going to go up and he knows he will not be able to make them, and he has no equity. He cannot sell the home to cover the balance of the loan. At his point, he can either try to negotiate a short sale with the lender or go into foreclosure.

If the lender agrees to a short sale, they are buying back the loan for less then what they are owed. This is not something a lender has to do by any means, but it is an option for them. Why would they consider this? The real cost for the lender in a foreclosure action is that they have to carry the loan until they can resell the house. They have to pay the taxes and insurance and this can take time and the cost of carrying the loan can become quite substantial. In some cases, it will be more beneficial for them financially to take the short sale.

How does it affect credit? Typically the loan will show up on a credit report as "settled for less then the full balance". This will have a negative impact on the borrowers score, however it will be less then if it shows as "foreclosure". How much it will actually affect the score will depend on the rest of the borrowers credit history. A short sale can also have a negative affect on a borrowers credit if a deficiency judgment is issued by the lender. A lender may take this route even if they show the actual mortgage on the credit report as paid as agreed.

When they take the short sale these is still a difference between the actual mortgage balance and the amount of the short sale. The lender can then issue what is called a deficiency judgment against the borrower and this will show on a credit report just as any other judgment would. Sometimes the lender will put the borrower on a payment plan for the deficiency without issuing a judgment. Again, this would be optimal. The one instance where a lender will not consider a short sale is if the borrower is in bankruptcy. A short sale payoff is considered by lenders as a collection activity and collection activities are prohibited once a person has filed bankruptcy.




































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