Monday, June 28, 2010

Short Sales Don't Solve All Credit Score Problems!

I spoke to a seller of a home yesterday. She had not paid her mortgage in TWO years! (Actually this is not that unheard of) Interestingly enough, the bank has not wanted to foreclose on the property - think "shadow inventory" here. She decides to move back in to the home to offer it for sale as a short sale in order to "save her credit". Ummm... hello... a short sale will not save your credit if you haven't been making payments for 2 years - I imagine the credit is devastated at this point. The difference between the points hit on a short sale and a foreclosure for this client are minimal. For someone who just missed his first payment on a mortgage and is concerned to limit credit score hit - then a short sale would be preferable over a foreclosure. Keep in mind, the right kind of short sale is what we strive to achieve. The right kind would be a non-deficiency statement from the lender which states that no further collection will happen and the bank is satisfied with the short sale proceeds. Each case is different and each is worth taking the time to review with an attorney, CPA and an experienced foreclosure alternative Realtor.


Anonymous said...

I guess in this case -- where there are 2 years of unpaid mortgage -- the best choide now for the "homeowner" is to stay until the bank really forecloses, and then start renting, correct?

Mario Pinedo, CCIM said...

It's not clear what would be best for the homeowner based on what we know of the situation. The credit score issue seems clear - either with a short sale or a foreclosure the current credit score hit has already happened and the differential between the two would be minimal.
What still plays a role as to which alternative (including bankruptcy) are the following:
1. Were the loans on the property "purchase money" loans?
2. Did the owner refinance the loans after purchase?
3. Was one of the loans a credit line?
4. Was the property an investment property at purchase?
5. Were there co-signers on the loan that filed taxes on the property as a partial investment for themselves?
6. What are the capital gains associated with the property?
The idea here is to evaluate whether the homeowner may be liable for any deficiencies after a foreclosure. If so, then a short sale or bankruptcy may give the homeowner the protection that they would want. Keep in mind - only if the short sale documents negotiated are favorable. Not just any short sale is favorable.
Once all the info is gathered, then the right decisions can be made to protect the homeowner and give the best overall financial, emotional and perhaps ethical decision.