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Foreclosure & Short Sales

How much will a Short Sale hurt my Credit Score?

It goes without saying but a short sale will no doubt damage even the highest credit score.It is fair to ask, what is a reasonable expectation for your credit to be after a short sale has concluded? It is impossible to say conclusively, but first and foremost it is important to understand how a credit report is scored.

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Do I still owe after a short sale?

A common problem with short sales is that the seller doesn’t know precisely what he or she owes after the sale is final. That’s because short sales are complex contracts and are usually only drawn up in situations that are unfavorable for the seller. Unfortunately, that’s the reality of the post-2008 market, and it’s usually the lesser of two evils (the other being the “f-word”: foreclosure).

In many short sales, the bank agrees to discount the repayment of the seller’s home loan. That is, if they bought the house for $120,000 and the sale price is $80,000, the bank will only demand $80,000 in repayment for the $120,000 loan. This sounds like a great deal—and usually it’s the only deal—but there are a couple of things to watch out for.

The first is that $40,000 you made on the loan will probably be counted as income, and the bank will issue a Form 1099 which means that you’ll be on the hook for tax on that income. If you’re really out of money, this is unlikely to cause a real problem, but if you have a little more than most short-sellers, you may be in trouble.

The other issue is that banks will sometimes seek a “deficiency judgment” against sellers. That means that the bank would like to recoup the money you owe them but are unable to pay because of the value of your home. If the seller has not requested that the bank waive its right to seek a deficiency judgment, it’s still on the table. Being unable to pay a judgment can further damage your credit.

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Short Sales vs. Foreclosure – The Process

Many of you are probably wondering what you should do with your underwater mortgage, and for some of you, the only options are probably short sale or foreclosure. It’s not an easy question to answer: only licensed financial professionals and realtors should be giving you advice on which to choose, and even then, they should be doing it in person or over the phone. Never, ever take advice from a stranger.

That said, we’re going to go over what the differences between short sales and foreclosures are, so that when you do talk to a professional (in person!) you know a little more what you’re talking about. When it’s your financial survival on the line, you want to make sure you’re as informed as possible.

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