Short Sale vs. Foreclosure: Credit Rating Effects for Homeowners in New Mexico

Short Sale Credit Implications

Now, more and more homeowners are in a quandary. They are not behind on their mortgage , nor in any stage of foreclosure, yet they have to sell a home that has dropped in value below the purchasing price. Some banks are accepting short sales that are not in default–an impending foreclosure generally motivates the bank to sell. Facing the addition of another non-performing asset to their balance sheets, most banks do not want to become homeowners.

If you are a homeowner facing this situation, what are your options? You can keep paying and wait for the market to turn around (something many economists are now stating will not happen for the next 5-10 years). If that is not an option because of an upcoming ARM reset, forced relocation, or other circumstance outside your control, then you have some difficult choices to make. For example, if your refrigerator is empty and you have a quarter tank of gas to get to work, and your choice is to pay your mortgage or eat and be able to get to work, only you can make that decision.

We would never advise anyone to miss loan payments for the purpose of gaining leverage for negotiating a short sale. If you can not make your payments, you need to seek help, as stopping your payments as a home sale strategy is not advisable. Consult a trusted accountant for more information.

3 Years VS. 7 Years

As with any financial transaction, there are credit score implications that come attached. Your credit will be marred whether you decide to let the bank foreclose, or is you sell the property via a short sale. However, you can begin effective credit rating recovery three years after a short sale, while a foreclosure will adversely affect your credit rating for up to seven years.

Credit Report Monitoring

Unlike a foreclosure, there is no credit reporting designation for a short sale. Lenders may report that the loan is satisfied as agreed, is satisfied for less than the full amount, or in come rare cases, is satisfied in full. There is no set rule on the impact to your credit rating, so it is essential for you to monitor your credit rating and make certain the satisfaction of the loan is promptly reported by the lender to all applicable credit bureaus.

Foreclosure Deficiency

After a foreclosure, the bank will sell the property to recoup their losses. The proceeds of the sale will be subtracted from what was owed, plus ALL expenses (holding costs, attorney feeds, repair costs, etc.). If the bank is unable to recoup all their losses, they have the right to file suit against the former owner for the shortfall. This takes the form of a deficiency judgement against the homeowner. Just because the bank took the property does not mean that all is said and done, and that there are no further implications for the homeowner.

Comparison of Foreclosure and Short Sale Effects

Issue Foreclosure Successful Short Sale
Credit Score Score may be lowered from 250 to over 300 points, and will typically affect score for at least 7 years. Only late payments on mortgage will show, andn after sale, mortgage is reported as ‘paid as agreed’ or ‘settled’. This can lower the score as little as 50 points and the effect can be as brief as 36 months.
Credit History Foreclosure will remain as a public record on a person’s credit history for 10 years or more. A Short Sale is not reported in credit history. There is no specific reporting item for ‘short sale’. In most cases, a loan is typically reported ‘paid in full, settled’ or ‘paid as negotiated’.
Security Clearances Foreclosure is the most challenging issues against a security clearance outside conviction of a felony. If a homeowner has a foreclosure, and is a police officer, in the military, the CIA, Security or any other position that requires a security clearance, in almost all cases clearance will be revoked and the position will be terminated. On its own, a short sale does not challenge most security clearances.
Current Employment Employers have the right to check the credit of all employees who are in sensitive positions. A foreclosure in many cases is grounds for immediate reassignment or termination. A short sale is not reported on a credit report and is therefore not a challenge to employment.
Future Employment Many employers require credit check on all job applicants. A foreclosure is one of the most detrimental credit items an applicant can have, and in most cases will challenge employment. A short sale is not reported on a credit report and is therefore not a challenge to employment.
Deficiency Judgement In 100% of foreclosures (except in those states where there is no deficiency) the bank has the right to pursue a deficiency judgement. In some successful short sales it is possible to convince the lender to give up the right to pursuit of a deficiency against the homeowner.
Deficiency Judgement (amount) In a foreclosure, the home will have to go through an REO process if it does not sell at auction. In most cases this will result in a lower sales price and longer time to sell in a declining market. This will result in a higher possible deficiency judgement. In a properly managed short sale, the home is sold at a price that should be close to market value and in almost all cases will be better than an REO sale, resulting in a lower deficiency judgement.
Categories : Foreclosure, Short Sales

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