Q: How does a short sale affect a homeowner’s credit score as compared to a foreclosure?
A: If the homeowner is participating in the federal government’s Home Affordable Foreclosure Alternatives (HAFA) Program, there are definite credit benefits to choosing a short sale over foreclosure. Recent changes to the HAFA Program dictate what the lender can state on the borrower’s credit report after a short sale, and lessens the impact on the borrower’s credit rating. Credit bureau reporting of HAFA transactions where the deficiency is forgiven is now to be reported as “Paid or closed account/zero balance” or “Account paid in full/a foreclosure was started”, as applicable. A short sale is usually reported as “Account paid for less than the full balance”, or similar statements which have a negative affect on the homeowner’s credit score.
While doing a short sale will negatively affect credit, short sales by their very nature may well have a lesser effect on credit than foreclosures. For instance, a completed foreclosure means the borrower has, at a very minimum, missed six months of payments (often considerably more). The property has also gone through a completed foreclosure sale. So while a short sale negatively impacts credit, the effect has been shown to be less than a full blown foreclosure which followed months, if not years, of missed payments.
Some people feel there is a much stronger social stigma attached to foreclosure as compared to a short sale. With a short sale, the homeowner is in control of the sale, not the bank. In fact, today cash incentives may be available to homeowners who decide to do a short sale instead of foreclosure. When the consumer wants to obtain a loan to purchase a property in the future, more opportunities will be available to them sooner if they do a short sale. For example, contrary to popular belief, one can be current on their payments and still do a short sale. And if a homeowner is current on their mortgage through a short sale, they can qualify for an FHAloan afterwards without any waiting periods. The same option is not available following a foreclosure.
Every homeowner’s situation is different, so we always recommend speaking with a real estate attorney who can offer advice on the legal and tax implications for each individual’s circumstances.
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By Martin Goldberg
Martin Goldberg has been successfully negotiating short sales since 2003. Martin is a Windermere broker and partner in Washington Property Solutions, a company that helps brokers and homeowners successfully negotiate short sales. A Washington native, Martin graduated with honors from the University of Washington Law School and worked as an attorney at the Seattle law firm of Perkins Coie, was pioneering technology company Real Networks’ first lawyer, and then worked as in-house legal counsel for an Internet startup before making real estate his career. His 15 minutes of fame (actually 30 seconds) was as an extra on the TV show Northern Exposure. Martin lives in Bellevue with his wife and two children, who he takes on road trips whenever possible. He loves to explore the nooks and crannies of the United States, and has logged trips to 49 states.