A short sale is where you sale your house for less than you actually owe. This process has to be approved by your bank. There are a great number of issues with this process. The main problem is while getting approved for a short sale the bank will require you to stop making your mortgage payments. The other issue is there really is not much difference between a short sale and a foreclosure on your credit report. To make matters worse while getting approved for the short sale and after you have quit making your payments the bank can deny your request.
John Ulzheimer has discussed how short sales affect your credit and how there is not much difference between the two according to Fair Isaac. Both are negative on your credit report. Also while in this arrangement you will more than likely get a 90 or 120 day late payment on your mortgage history. Most banks will consider a 120 day mortgage late payment a foreclosure anyways. So you might be asking yourself what is the benefit of a short sale? I have been asking this very question my self since the inception of this program.
According to John Ulzheimer’s article at Mint.com a short sale is better than a foreclosure because the seller will keep up the home while marketing their home during this process. For example, mowing the lawn, keeping the house clean, etc….and avoiding theft of copper pipes in the home, etc…. While I partially agree, it’s still a lot of trouble considering the fact that when it comes to your credit report and scores there is not much difference between a foreclosure and a short sale.
I am not saying foreclose on your home, but keep in mind that either way it’s a tough situation on your credit rating long term.
Let’s assume you get approved for your short sale. You list your home on the market for $20,000 less than what you actually owe on it. Your home gets a contract in 15 days and you close on your home in 60 days. Now you have a 60 to 90 day late payment on your credit report. Keep in mind that you are not making your mortgage payments because the bank made you stop… I would have to say this is better than a foreclosure. At least you sold your home before you got a 120 day late on your report.
Let’s assume your company is transferring you out of state. Your home is $30,000 in the hole due to value issues in your area. This is another situation where you may not have a choice but to enter into a short sale arrangement. Now you could sell your home for $30,000 less without doing a short sale and pay the difference at closing…If you did this your credit rating would not be affected. Of course who is going to do that?
My conclusion, a short sale and a foreclosure are about the same. In a perfect scenario where you sale your home fairly quickly, then a short sale could be beneficial even though it reports on your credit report as a settlement or charge off. Which by the way…will affect your credit rating. But let’s face the facts. Homes are not selling quickly in this current market. The average home is taking around 6 months to sell and in many cases longer depending on what part of the country you are in. So either way it’s a tough decision that will affect your creditworthiness one way or the other.
Mike Clover
CreditScoreQuick.com
