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Many homeowners ask how a short sale will affect their credit rating. Let us first say that we cannot predict the exact affect of a short sale on your credit report since we are not a credit bureau. There are many variables that affect your credit and it is difficult to determine the effect of a single variable. How your FICO score is calculated is an evolving process, and the factors that were used 6 months ago, may not be the same factors used to calculate it today. Equifax, Experian, and TransUnion are the three major credit reporting agencies your credit rating is composed of. Each use a different mathematical model to calculate your FICO score.
How it Affects your Credit Score
Keeping a full “Foreclosure” off of your credit report is an objective we work towards. Once a short sale has been approved your credit report will most likely show one of the following:
- Settlement
- Settled for Less than Full Debt
- Pre-Foreclosure in Redemption
Your credit score will be greatly affected by the 30-60-90-120 day late mortgage payments. If you are 180+ days delinquent, they may report their loss as a "Charge Off" which will show on your credit report also.
The impact of your credit score on a foreclosure is 100 to 200 points greater than a short sale. The largest damage occurs when 1) you become 120 days late, 2) the foreclosure is filed in the county records and 3) a file is currently in collections.
Here is the Good News!
We are associated with a Credit Repair Company who has over 20 years of credit restorations experience, a tremendous reputation, and provides their service nationally and internationally. This company has been able to make substantial improvements to damaged credit scores, helping people become credit worthy in a shorter period of time.
Visit the Credit Rescue Now, Inc. website and mention the Loss Mitigation Center.
Lender accepts the Short Sale
When your lender accepts a short sale, they are agreeing to receive less money than what is owed on the mortgage so the property can be sold. By agreeing to the short sale your lender(s) will release their lien(s) from the property. Yet the lender generally has two types of releases.
1) Declare the debt paid and settled in full and release the lien (called a "full release and satisfaction")
2) Consider you personally liable for any unpaid balance of the loan but release the lien on the property ("lien release only").
Our negotiators will always seek a "Full Release and Satisfaction" of your debt. Although obtaining a full release and satisfaction from your lender is a goal we set for you, there are some cases where lender(s) may not allow it.Am I Liable for the Deficiency?
The incentive for lender(s) to accept a short sale is that they will make more money quicker than to finalize a foreclosure. With a foreclosure or short sale, lender(s) will typically lose large sums of money in either transaction. As a result of that financial loss they can:
Granted a “Full Release and Satisfaction”
They can write the loss off on their taxes as a business loss and they must report it to the IRS and send you a 1099-C for the dollar amount of the loss. IRS says that because you did not have to pay it back, you technically received the benefit of the money. It is treated as ordinary income that you need to pay tax on. But there is the Federal Mortgage Debt Relief Act of 2007 that has put a moratorium on IRS collecting tax on all foreclosure-related 1099's for primary residences through 2010. Also, the IRS Form 982 can be used to show that you were insolvent at the time of the foreclosure and release you from paying the tax. We are not CPA’s or financial planners and always recommend that you consult with a CPA or financial planner to discuss your particular situation when it comes to tax consequences.
Granted a “Lien Release Only”
The lender or whoever currently holds the note has the option to sue you to collect the difference from you. In most states the lender can choose to pursue you for the difference between the dollar amount they recover (regardless whether short sale or foreclosure) vs. how much they were owed. This commonly referred to as a "deficiency" or the "shortfall balance". How lenders can do this even after they have released their lien is based on the fact that you signed a “promise to pay” when you received the loan. Not all lenders pursue the deficiency but it is an option they attempt to keep open.
Options they may consider for the deficiency:
- As a condition of your lender approving the short sale they may ask you to sign a new "soft" promissory note for all or part of the deficiency. These notes are usually 0% interest and payable over 3 - 15 years.
- Some lender(s) may ask you for a small contribution towards their NET Proceeds. This contribution is based on the amount of the financial loss the lender will take on and your financial situation. The more they see you have, the more they'll ask for. The contribution amount they may ask for ranges between $1,500 and $7,000.
- They may sell this debt (the deficiency amount) to a collection agency or attorney. They will proceed with collection efforts, obtain a court judgment against you and garnish your wages or assets. This is an uncommon option and seldom used by lenders.
- Lenders may opt to “Do nothing.” They may choose to not spend additional time and money pursuing the deficiency since they are aware of your financial position. Thus it is possible you may just receive a 1099.
Short sales is a better option for any lender. It will allow the lender to recover more money and quicker than foreclosure. For the homeowner it will create a smaller shortfall balance (deficiency) that will reduce their tax liability.
A foreclosure will stay on ones credit report for about 7 years, while the effects of a short sale are several years less then that. In addition, there is another positive benefit of a short sale compared to foreclosure regarding shortening the delay to renewed loan worthiness. Fannie Mae (FNMA) recently changed their underwriting policy for purchasing mortgages from Banks. A past Orange County home owner has to wait 5 years after a Foreclosure Sale before FNMA will underwrite a new mortgage loan. But, if the home owner conducted a Short Sale, then the wait time for a new loan with FNMA is just 2 Years!
Please Note:
The Loss Mitigation Center does not provide financial counseling of any kind. We are not attorneys, accountants, or financial planners. Any discussion we participate in represents our opinion only and it not to be considered replacement for the advice of a qualified professional. If you have any questions in these areas we highly suggest that you seek the advice of an Attorney, a Certified Public Accountant and/or a Certified Financial Planner.
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MANDATORY FTC DISCLOSURE: We are a for-profit company. The Loss Mitigation Center is not associated with the government and our services are not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan. If you stop paying your mortgage you could lose your home and damage your credit rating.
IMPORTANT: We DO NOT provide the services of nor do we act as bankruptcy counselors, attorneys, lenders, accountants, financial planners, financial counselors, nor are we a debt relief agency. The content of our website is not legal advice and represents our opinions only.