Short Sales today seem to be all the buzz! While the pros and cons of a short sale can be bantered back and forth, there is one negative that isn't fully understood: many think that a short sale is saving their credit.
IT'S NOT!
When you a buyer does a short sale to assist them in the sell of their home, it will show up on their credit, even if the investor agrees to accept the balance as paid in full. When the seller of that home attempts to purchase their next home and completes the loan application form, there is a question "Have you ever had title or deed transferred in lieu of foreclosure". The correct answer would be "Yes". NOW is when there is the issue ...lenders DO view a short sale (or any mortgage 120 days or more past due, for that matter) the same as a foreclosure. Start the clock ticking, cause now we have to wait three or four years (depending on the loan program) to get them approved for the new loan.
Few sellers are actually told this!
However, it would seem that SOME sellers did understand this upfront. So, they acquired a new home before letting the existing home go into default or positioning themselves for a possible short sale. They "leased" out the current home so they weren't hit with two payments and could qualify for the loan on the new home. And when the "lease" would fall through, the seller would then quit making the monthly payment on the initial home not caring about the impact on their credit.
So now guess what? The guidelines have changed on accepting a lease agreement to offset the current mortgage payment.... and it's not pretty! We no longer can accept just a signed lease agreement, but we now also have to document the deposit AND the property must have 30% equity in the existing home!!! (This new rule does not apply to government loans.)
So I ask you, how many today have 30% equity in a home they are thinking about renting? But the better question is who with 30% equity would let it go into foreclosure?
Yikes!
Opinions expressed here are the sole responsibility of the author, and do not necessarily reflect the view of Starkey Mortgage.
Ruth Vogt, Colorado Regional Manager
Colorado #LMB100023827, NMLSR# 257576
Good info. Credit is another thing people don't know much about yet it greatly affects us and our opportunities. I think consumer credit classes could help get some people educated so that they don't head down the wrong road before it's too late.
Good post we are seeing people doing this in Florida not understanding what the final outcome will impact them in the long run. There is no such thing as a free lunch and I have refused to work wihen contacted by people that think this is a great idea.
Wow, that is very interesting. I have heard of people doing this. So you are saying that going into foreclosure and a short sale effect the credit score the same right?
Brooke
Hi Ruth,
Just to clarify, this article is more from a mortgage lender's perspective than other creditors.
What you're saying is that a home lender will see that you couldn't make your house payments and basically had to give it back.
That being said, it should be scored differently by the FICO algorith than a foreclosure (meaning a short sale would be a different score than a foreclosure...and my best guess is a higher score, too.) Also, other creditors may not view them the same way (i.e. when shopping for a car.) All in all, in my estimation, a short sale is MUCH better for both your credit and your finances than a short sale would be (especially after 2-4 years.)
Didn't mean to hijack your blog, Ruth! Keep up the great work and feel free to ping me back with any comments. :)
Cheers!
Jamie
Thanks for the clarification, Jamie. You are exactly right... I gave input from a MORTGAGE lender's perspective only.
Appreciate the clarification!
Ruthie V...