How does this affect my Credit?
Example 1: Short Sale
Mr. Jones owns a home in which he has a mortgage balance of $200,000 and a current market value of $150,000. Mr. Jones has elected to short sell his property. His agent successfully obtains a buyer who puts forth an offer price of $135,000 (90% of the current market value). After reviewing the buyer’s offer and the financial hardship information from Mr. Jones, his bank agrees to accept the short payoff of $135,000 which would leave a deficiency balance of $65,000 plus closing costs (his bank pays all the closing costs, including agent commissions and taxes for him in a short sale). The transaction closes and is final. Mr. Jones then pulls his credit report 60 days after the transaction is completed. On the credit report, he sees that the mortgage trade line states “Mortgage debt was settled for less than full” and the balance on the mortgage is $0. Mr. Jones is now on the road to financial recovery.
Example 2: Foreclosure
For the ease of illustration, we will use the same value and mortgage debt amounts as in Example 1. However, Mr. Jones has elected to forgo the short sale process and let the bank foreclose on his property. The bank holding his mortgage facilitates the proper legal procedures to foreclose on the property, all of which are costly. Mr. Jones is notified that his property has been foreclosed and taken back by the bank to sell as an REO. Six months later, the bank finally sells Mr. Jones home for only $120,000 (80% of current market value). Remember, as a short sale, the home would have sold for $135,000 keeping the deficiency at $65,000. In addition to the deficiency now being $80,000, the bank has elected to add on legal costs of $15,000, closing costs of $10,000, and asset preservation costs of another $5,000 for a total deficiency liability of $110,000. Mr. Jones pulls his credit report 60 days after being notified that the bank has sold his property and that he is liable for the deficiency. On the report he sees that the mortgage trade line states “Foreclosure” and the balance is $110,000. Because Mr. Jones chose to allow the property to go to foreclosure rather than doing a short sale, his road to financial recovery has taken a major detour. He not only has a foreclosure on his credit report now, but he also has a $110,000 deficiency balance on his credit report. His bank will likely seek a deficiency judgment against him within 2 years of the foreclosure for this $110,000 deficiency. This $110,000 deficiency judgment will follow and haunt Mr. Jones wherever he goes now (for about 10+ years). Mr. Jones will also likely have to retain an expensive attorney at some point to help defend against this $110,000 deficiency judgment.
The Best Option is Clear:
While the financial, legal, and credit advantages are clear when choosing a short sale over a foreclosure, other advantages are sometimes overlooked. The most important of all of them is maintaining the seller’s dignity and peace of mind. We have heard too many stories of families having to leave their homes because of a Sheriff’s orders or some other type of legal action the bank has taken. The short sale process alleviates this negative social impact. The process puts control back in the seller’s hands so that they can get back on the road to financial recovery. Between a short sale and a foreclosure, the short sale is always the winner.
Read more about the Credit implications of Short Sale, Foreclosure, and Bankruptcy