An attorney offers the opinion that once the NOD is filed, the credit damage is done. He further opines that with hundreds of thousands of foreclosures, there has never been a better time to for a homeowner to walk away. The credit damage bogeyman is a scare tactic promulgated by the lending industry which, by the way, is mostly responsible for this mess. Foreclosures are happening to doctors, real estate brokers, and, yes, attorneys. These homeowners are not deadbeats or bums; they are reputable citizens in trouble. What? Says the attorney, is the lending industry going to refuse loans to these people when they show up in a couple of years with 20% down. The lending industry needs these people to saddle with more loans. The attorney further offers this accusation: the folks most benefiting from short sales are real estate agents and lenders. Homeowners receive no demonstrable benefit from a short sale vs. foreclosure.
That attorney is frankly nuts, and feel free to refer them to me to debate it. Let’s start off with the very simple fact that if the 1st mortgage forecloses the borrower remains liable for the 2nd mortgage. Yes, the 2nd loses their security interest in the property, but they have not given up any rights to collect the debt from the borrower themselves.
And in states that allow deficiency judgements even on the foreclosed loan a shortsale can save the borrower from years of debt collectors and potentially even bankruptcy.
By negotiating a shortsale, the borrower can be confident that this is completely behind them aside from a lower credit rating.
That said I agree that there is a lot of fear mongering and misinformation out there and that some of it is an attempt to scare homeowners into making bad decisions - providing balance to that is one of the primary reasons for this site. I also don’t think having a foreclosure is catastrophic – but I firmly believe that keeping a seat at the table and trying to get a short sale done is in the borrowers best interest.
Counter arguments anyone???
Per MyFico.com’s website: They state that a short sale, deed in lieu, or foreclosure all have the same effect on credit scores.
MyFico is owned by Fair Isaac, the inventors of credit scoring.
So many agents and owners believe that the short sale will go easier on their credit scores and make it easier to buy a house again sooner.
The fact is, they do not. A short sale or foreclosed owner will still need to wait the 5 year period after foreclosure to buy a home using a FNMA loan.
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As for the 2nd trust deed holder coming back on you, I am not qualified to answer other than the fact that many who have lost their homes have done so because of a major illness. It is important to seek the advice of an attorney and CPA as a bankruptcy might be the very best thing for a person. The Fresh Start can make it possible for a person to provide for their own retirement.
Hi Mary - Thank you so much for contributing. I think that saying a short-sale, foreclosure or deed-in-lieu all have the same affect is an over simplification, based on what I’ve gleaned from myfico.com. I think what the moderator was trying to say was that in all three cases it will show as seriously derogatory, and ultimately as settled for less the amount due. But note that if you are doing a short sale or deed-in-lieu this can be negotiated - it is the lenders choice as what to report to the credit bureau. Similarly the right for the lender to pursue a deficiency judgement can be negotiated (when the lender has the right to pursue one). Based on those two facts it is ALWAYS better for the homeowner to remain at the table and try to get a short sale done. Second, the vast majority of foreclosures? have nothing to do with illness at the moment.? And in situations where negative equity and perhaps an ARM reset are the only reason for foreclosure folks really should do everything they can to avoid BK. A BK is ABSOLUTELY worse for your credit than a foreclosure, just by the simple fact it stays with you 10 years instead of 7.
Sean -
Here is another benefit of completing a Short Sale?vs Foreclosure. In a memo from Fannie Mae - see the link below, dated, 6/25/2008 - it basically says that Fannie Mae will lend to someone who has had a short sale (pre-foreclosure) after 2 years versus 5 years if someone has had a foreclosure.? This is really good news for homeowners who have a tough situation with their housing?who choose a Short Sale vs Foreclosure.
https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0816.pdf
BOB
Great find Bob, thanks for posting it!!! Yet another reason for Realtors to help folks get a short sale done – they’ll have a repeat customer back in just 2 years (though hopefully in a property they can afford).
SEAN - I LIKE YOUR STYLE…
GREAT FIND… ON THE FANNIE MAE PDF…
I SEE NOTHING ELSE FROM ATTY… ??
KEEP IT COMING…
Sean,
You seem to know what you’re talking about.? I’m a Commercial Lender for a bank and a former Examiner in the consumer Bureau for the State of Idaho regulating mortgage lending and credit reporting, (amongst other areas).? I’m suprised at how few people really know the effects different actions will take on their credit, but I guess banks and reporting agencies sort of like the fact that they don’t, else everyone would take the shortre route.? Both actions can (foreclosure and settled) may stay on the owners report up to 7 years.? Notice, I said may…, there is no law that says it has to.? It has been my experience that consumers have an easier time convincing creditors to remove settled from their bureau, than removing Foreclosure… after say 4 or 5 years.? Also as a lender I would be more inclined to not rubber stamp a decline based on settled over foreclosed…, there is a story behind settled I might be able to work with…, foreclosed is foreclosed.
Thanks Richard! I really appreciate the additional insights on how a shortsale or settlement is better than a foreclosure.
Wow… No benefit to the homeowner huh…?? strong words of advice… have you ever had a foreclosure on your record? FHA seems to like the responsiblity of a homeowner who hangs in to assist in the organization of the short transaction… 2 year wait till a new loan is capable origination… I guess you can help me understand the benefits of foreclosure…
Not all foreclosures and short sales are profitable. To pull a home out
of foreclosure, buyers need to make up back payments to the lender, pay
all imposed fees and either pay off the loan or make arrangements to
sell the property. Few lenders will let a buyer assume an existing
obligation.
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The fact that is continually overlooked is that following a short sale, if you have a deficiency judgement, that debt is on your credit. ?Not only will your credit need to recover, you will have to pay that unsecured debt off. ?I’m not sure how many people will be able to pay of $50-60K (or more) over that two years they are waiting for their credit to heal. ?I suspect that many of these people will become the wave of people that file bankruptcy down the road.
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Do not short sell your home unless you get a written release of all liability from your lenders. ?ALL OF THEM. ?Modify your loan instead. ?Keep your house. ?By the way, a loan modification has no negative effect on your credit. ?However, a successful modification does bring your loan current by nature of the process.
This is going to be true regardless of whether the homeowner does a short sale or not. At least if they pursue a short sale they get a shot at negotiating a release of liability. Even if they aren’t able to negotiate the release, it will still be better than a foreclosure. ? That said, you are correct that it may be preferable to explore a loan modification first. This assumes the person doesn’t have to sell - due to job loss, or relocation for example. It also assumes the lender is willing to do a reasonable loan mod - which is still fairly rare.
Sean, Are there updates after these guidelines you posted here in 2008?
Yes-? Many homeowners are calling me to short–sale because they could not get a loan modification that made sense. Two of our sellers recently were told flat out that the lender would not modify- so to?go for a short-sale and they told the homeowner they’d approve it. (We’ll see… but most of them have been going through… Even?one without documentation - without bank statements or income verification- Wachovia approved and closed within 60-days!)
New information as of January 2009: There is ONE major benefit by SOME FHA lenders! A short sale will not be counted against a borrower if they want to buy a new home right away. A foreclosure requires a waiting period of two years.
Mary, What is the source of that statement?? That would be great news.? Where can I verify that?
Hi Patrick, They are in the undewriting guidelines of a lender that I use for FHA loans. I regularly read lender?guidelines. Are you a loan officer or someone looking for an FHA loan? ?
No, I’m just a poor schmuck who’s considering a short sale and wondering how bad it’s going to affect my credit and ability to get another loan down the road.
Hi again, I will be happy to let your loan officer know who the lender is when you get ready to buy again. If you are going to buy in California, I would be happy to help you. Do you want to stay in your home? Loan modifications are happening now and we might be able to modify the loans so that you can stay in your home. Call me to discuss your situation. I am a mortgage loan officer, credit analyst, and loan modifications professional. I would be happy to discuss your situation with you. Best Regards, Mary Supinger 619-701-4321