Short Sales vs. Foreclosure. What Are The Effects On Your Credit?

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Real Estate Agent with Real Estate TeamMates

Homeowners facing foreclosure have a number of options, one of which is doing a short sale. Some people, depending on their situation, may allow a property to go into foreclosure instead of attempting a short sale. One reason is they don't have any expectations of saving the property so walking away is an easy solution.  By accepting a short sale, the lender can avoid a lengthy and costly foreclosure, and the owner is able to pay off the loan for less than what he owes. The primary consideration above all is the affect both can have on your credit score.

The Basics Of A Short Sale
The concept of a short sale is fairly simple. A short sale occurs when the sale proceeds of a property fall short of what the owner still owes on the mortgage. Many lenders will agree to accept the proceeds of a short sale and forgive the rest of what is owed on the mortgage when the owner cannot make the mortgage payments.  A few words of warning are in order. Not every lender will negotiate a short sale. If for example your payments are current, yet you foresee imminent cash flow problems arising that will affect your ability to make your monthly mortgage payment. Lenders have no interest in negotiation unless your payments are several months late. Another consideration is you may be held liable for taxes on the difference between the sale amount and the original loan amount. Short sales require nerves of steel.

The Credit Affects
Foreclosure
Without a doubt sellers will incur more damage on their credit report by going through foreclosure. Typically your credit score will take plunge between 200 to 300 points.

Short Sale
Short sales have a far less damaging affect on a seller's credit report. Credit scores typically lose between 80 to 100 points.  What happens to your credit down the road? It is takes around three years after a foreclosure before a lender will offer a sensible interest rate, whereas for a person who went through a short sale typically waits around 18 months to buy another home at a good interest rate.

Salvaging your credit should always be the primary concern when making the decision between a short sale and foreclosure.

Sergio Rebollo Jr.
Miami Short Sale Specialist
Exit Prime Realty
www.SergioRebollo.com

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Rainmaker
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Bill Parecki
Hawaiian Island Homes, Ltd - Hilo, HI
RS, ABR, RDCPro, SFR, E-Pro, CFA

Aloha Sergio,

 

Great post and a lot of good information.  Short sales in Hawaii have taken a turn for the worst with legislation inacted over here which in essence do not allow Real Estat Agent to even suggest a short sale and forbid us to contact the backs with out the possiblilty of our commission  be two months of mortgage payments or one year of property tax which ever is lower.

Sep 20, 2008 10:18 PM #1
Rainmaker
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Sergio Rebollo Jr.
Real Estate TeamMates - Miami, FL

Aloha Bill,

That's whacked!!!  So who's allowed to suggest a Short Sale?  Lawyers only?  Who are they trying to protect....banks?

Sep 21, 2008 08:45 AM #2
Anonymous
John Kelly

Hi Sergio, Thanks for welcoming me. I look forward to trading ideas and experiances and learning from eachother. I hope you have a great 09

Jan 10, 2009 11:09 AM #3
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Rainmaker
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Sergio Rebollo Jr.

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