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Short Sales vs. Foreclosures….Your Credit Will Suck Either Way
I get a lot of calls these days from real estate agents wondering what effect a short sale or deed in lieu of foreclosure (DLF from here forward) will have on borrowers’ credit. That is a really important and interesting question, since the last real estate downturn preceded the widespread use of Fico scores and automated underwriting (AU) systems.
Everyone now seems aware that debt cancellation creates taxable income. In a short sale, the amount of the lender’s loss is reported to the borrower as income, creating an income tax liability for the borrower. If the borrower is insolvent at the time, the tax liability can be avoided, but only to the extent that liabilities exceed assets.
But how will credit scores be affected? And if a loan is approved through LP or DU, Freddie Mac’s and Fannie Mae’s automated underwriting engines, will the underwriter overturn the approval when she sees the typical “settled” comment on the mortgage tradeline?
For answers to these questions, I turned to my credit reporting agencies and representatives from the capital markets to see what is boiling inside the pot.
Credit Bureaus and Fico Scores
The word from inside is that short sales and DLFs are a hot topic. The scoring models are being revised to put them in parity with foreclosures. Although some agents are suggesting that short sales are not as damaging to credit as foreclosures, that would be a bad bet. Though it may be some time before we see credit scores for borrowers emerging from short sales, just assume they are going to tumble.
Given the inherent conflict of interest—a Realtor makes a commission on a short sale and doesn’t in a foreclosure—the real estate professional should proceed cautiously when counselling a seller. A short sale that leads to a tax liability and possibly to further financial hardship or bankruptcy could easily backfire on the party who profited most from the transaction. If the resulting credit scores also render the buyer unable to purchase another home or cause increased costs for auto loans or credit cards, it is easy to imagine the borrower taking a dive and hoping for a red card.
Automated Underwriting Approvals
Typically, there is no public record of a short sale to undermine an AU approval. Although AU may still see it, we’re not certain of the effect it will have. So I asked a couple of underwriters and the V.P. of American Pacific Funding what would happen if an AU submission was approved and the underwriter later notice a “settled” comment on the mortgage tradeline. They didn’t know, but the question triggered a vigorous and immediate investigation.
Running that question up the flagpole in the capital markets illicited a blunt response and revealed a clarity of purpose from which we should take our cue. There will be no leniency shown toward short sellers. Investors dictate underwriting rules, and their instructions could not be more clear. Show no mercy. Punish the borrower who defaults. Make it difficult for them to do it again.
Waiting for Guido
Mortgage money belongs to people who expect to be paid back. Layoffs, health problems, and job transfers are the borrower’s problem. If the market takes a turn for the worse, the borrower needs to figure out how to make the payments until things improve. If the investor is dragged in to the mess by a short sale or deed in lieu of foreclosure, Guido will be paying a visit. He may leave your knees intact, but he won’t be so kind to your credit. And you won’t be buying a home anytime soon.
January 24th, 2007 at 9:26 am
[…] Sacramento Short Sales: A Response from Freddie Mac What effect will “short sales” have on a borrower’s credit and ability to secure another home loan? Without the public Notice of Default that precedes a foreclosure and notifies the credit bureaus, will “short sales” slip under the radar? In my earlier post Short Sales vs. Foreclosures….Your Credit Will Suck Either Way, I summarized the initial responses to the questions I had run up the capital markets flagpole. […]
January 29th, 2007 at 11:00 am
[…] Second, once a seller knows that all her equity has evaporated, she often cares much less about price. You can’t lose more than all your equity, right? It’s the lender’s problem now. Uh….not completely. […]
February 24th, 2007 at 9:04 am
[…] Sacramento Short Sales: A Response from Freddie Mac What effect will “short sales” have on a borrower’s credit and ability to secure another home loan? Without the public Notice of Default that precedes a foreclosure and notifies the credit bureaus, will “short sales” slip under the radar? Are they less onerous than a completed foreclosure as many people suggest? In my earlier post Short Sales vs. Foreclosures….Your Credit Will Suck Either Way, I summarized the initial responses to the questions I had run up the capital markets flagpole. […]
April 15th, 2007 at 9:08 am
If your credit will suck either way, then why do all the work on a short sale, you might as will let it go to foreclosure.
April 15th, 2007 at 5:53 pm
Exactly. My arguement is simply that doing a short sale won’t preserve your credit any better than a foreclosure. Sellers shouldn’t do it for that reason.
But there may still be a benenfit to a seller in terms of the time it takes to get this out of their hair and get on with life.
June 16th, 2007 at 9:26 am
This country is going thru the highest rate of foreclosures in many years, perhaps the highest ever. There are real issues out there that have led to this rampant affliction. So, punish those who have suffered? What kind of garbage is that? The banks created their own mess with the new bankruptcy laws. A short sell may cause a lender to not gain as much profit as they’d like, but also allow them to avoid a serious loss from a foreclosure. A short sell is a remedy for everyone. Punishing because of it forces the seller to say, “what the f…?” how good a deal is that for anybody?
June 18th, 2007 at 2:09 pm
Bill,
In this part of the country, lenders who experience short-sales are not just making less profit, they’re losing money. Lenders who made the 20% 2nd loans commonly used to reach 100% financing frequently lose their entire principal.
So while it may seem vindictive of them to wish the buyer ill, put yourself in their shoes. If you loaned your buddy $10,000 to gamble and he lost it all, wouldn’t you tell him that the loss was his problem. Then if he told you it was your problem, not his, wouldn’t you tell your mutual friends to prevent him from doing this to someone else?
July 29th, 2007 at 12:02 pm
I don’t get it. The person who set up my last refinance left me hanging in the wind. I may not be the brightest light on the tree but to some point you need to trust what the person is telling you is the truth. (Truth in lending) Anyway I ended up way over my head on my home because of thinga I was told by this agent that didn’t come to be. so now I’m facing foreclosure. I am considering Short sale but again I don’t want to face the I R S later owing taxes on 100,000 dollars. Any suggestions???
July 30th, 2007 at 11:51 am
Randy, I’m sorry to hear about your situation. You have a lot of company right now.
In a short sale, lenders can only send you a 1099 for income (debt relief) for the amount by which their proceeds falls short of the original loan amount. In other words, they apparently cannot tack on fees, penalties, other costs, etc. That doesn’t help much.
Did your loan have mortgage insurance by any chance? What are the figures….sales price, loan balance(s)?
Email me or call if you prefer. Perhaps I can clarify a few things. Go up to the top of the page and click Contact. All my contact information is there.
September 4th, 2007 at 4:42 pm
Hi Marc,
I am in a difficult situation.
I was transferred quickly to another state. Before we moved I fixed up the house, new carpet, paint etc. I contacted two realtors and they both said that I would not be able to sell the house for the what was owed due to prepayment and realtor fees. I then turned to a rental management company who originally suggested that we set the rent below our “break even” price. We agreed, after one month they suggested that we drop the rent to $500 below our break even price. Now we are stuck with a house that is depreciating and the mortgage is going up (did I mention that it is an option arp loan). We have excellent credit and we have never been late on a payment but I do not see any way out. I contacted CountryWide and asked about Deed In Lieu Of Forclosure. Is this the best option or is a Short Sale better. I am most concerned about our credit ratings. Any suggestions would be helpful.
David
September 4th, 2007 at 4:56 pm
David,
Very sorry to hear about that. It’s a tough situation. Whether a Deed in Lieu is the best way out or not is a topic of great interest right now.
From a credit and future qualifying standpoint, this traditional reveals itself on that entry on your credit report in a comment like “settled”. Underwriters are sensitized to this and traditionally have treated DLF’s just like regular foreclosures. In other words, they won’t make you another loan for several years.
In addition, if the credit scoring models pick this up, I expect credit scores to be depressed as well.
One thing you might ask Countrywide is if they would convert the unpaid balance (assuming you sell) to a personal loan and allow you to make payments on that until paid off. Some lenders are doing this, and it could avoid any damage to your credit. But if it’s a big number and you don’t want to carry that liability around with you, you don’t have many other options.
All the best. Let me know what they say.
October 5th, 2007 at 8:50 am
Marc,
I haven’t had a chance to tell you yet, but this blog is great!! It really helps when I am talking with buyers and sellers. I want to give the most updated and straightforward advice possible, and your information really makes me look like a professional.
Keep up the good work! Hope to have a referral for you soon!!
October 5th, 2007 at 9:37 am
Marie, thanks so much for those kind words. My sincere hope is to bring clarity to lending issues in a way that allows my agents, clients, and consumers to make better choices. To know that it is of value to you is a great reward.
October 10th, 2007 at 3:58 pm
Hi Marc,
Here is my situation…I’m also struggling to decide whether I should go with short sale or foreclosure. The two things I don’t really care about are: 1) my credit score, 2) the amount of time it will take for me to buy another house. My real estate agent keeps telling me that short sale won’t affect the credit history as much as foreclosure but I don’t really need excellent credit score anytime soon…In addition, if I go with short sale I will owe another $4,500 in HOA fees, property taxes and termite damages, plus taxable 120k lender’s profit loss. So is the foreclosure better option for me? Also I have a question…will I owe anything to IRS if I go with foreclosure as opposed to short sale? And can they sue me or go after my assets?
If foreclosure only affects credit score and causes problems getting another house loan in the future, I’m willing to consider it. I’d really appreciate it if you could clarify some of those things for me. Thanks!
October 10th, 2007 at 5:15 pm
Hi Walter,
I have to disagree with your agent on issue. I hear agents saying this frequently, but I think it’s wrong.
When this whole mess got started, I researched pretty carefully how a short-sale might be interpreted by the credit scoring models and Automated Underwriting Systems that were not yet in use the last time we had these problems. Based on that, my conclusion is that your credit will be damaged either way.
That said, what state are you in? In California, the big issue is whether your mortgage debt is “recourse” or “non-recourse”. That determines whether or not the lender can pursue a judicial foreclosure and deficiency judgement against you.
There are also two different kinds of taxes you can incur. Debt relief on recourse debt can trigger an income tax liability on the amount of debt that is forgiven. You may also have capital gains taxes to pay. Insolvency can buy you a waiver of the taxes on debt relief, and I’m not sure how that would affect a capital gains liability.
You should definitely contact your tax advisor to get some comprehensive help and understand the implication. My claim to competence is more in the area of credit and qualifying for mortgage financing. Good luck man!
October 25th, 2007 at 2:18 pm
we are upside down on our loan
WE PAID $120,000 10 YEARS AGO- WE HAVE ARM LOAN AND NOW OW $125,000
(THE HOUSE IS DEPRECIATING DUE TO SEVERAL MITIGATING FACTORS)
iT APPRAISED FOR $110,000
Last year in October it was $750 @ 7.15
This october- today- 2007 it is $1173 @ 104 with a cap of almost 15! it raises ever 6 months
DO I GO BANKRUPT?
SHORT SALE?
FORECLOSURE?
WHICH IS BETTER ?
WHICH IS WORSE?
October 26th, 2007 at 12:29 am
Joyce,
Again, from what I can determine on the credit side of things, your credit scores and ability to secure a future mortgage will be equally damaged regardless of whether you do a Short Sale, Deed in Lieu of Foreclosure, or a regular foreclosure. Many real estate agents are telling people that a short sale hurts your credit less, but I don’t know where they are getting their information. With a short sale, they earn a commission. All I can think of is that it’s self interest and wishful thinking.
Congress appears to be heading toward having the IRS waive the taxes owed on “debt relief” which is normally taxed as ordinary income. Debt relief is “phantom income”; paper income equal to the amount of the loan that is forgone, with no real cash to pay the ensuing tax liability. Here in California, debt relief associate with recourse debt appears to income, while non recourse debt relief is not. That is the position of the California Association of Realtors lawyers.
Some folks who live in their homes a long time and refinance to pull cash out can experience capital gains as well. You need to talk to a CPA and an attorney about which option is best with respect to taxes.
My opinion on credit is that you should assume until we learn otherwise that your credit will suck either way.
October 29th, 2007 at 5:27 am
We just bought our home in July of this year..the company that brought us in assured us the job was long term. They left the small rural town we live in and there are no jobs here, infact more companies are moving out overseas and nothing is left..no jobs anywhere near us or even a distance, we are in the mountains…We have no money to pay the mortage here, even if we both worked two or three jobs a piece, we would have no health insurance, nothing else, unemployment will feed us for awhile and keep the heat on maybe if we are lucky..all we have is our retirement and we are getting older now, we need something to retire on and we do not want to cash in our 401ks here!
Our home is on the market and we had to put the purchase price at 5 percent more to pay the realtor who says we may never here, she sold us this home..she agreeded that it would take someone from outside the communtiy to afford our home, cause it is close to 180 grand and most homes in this area are under 100…
We are looking to rent in a another area and we wanted to know, what should we do? THere is no one to even rent it too, as there are truly not many jobs here, its an depressed small town, and its gettig worse here, at least we can move but will we ever he able to own a home again????
October 29th, 2007 at 7:22 am
Dear Helpmeplease,
Call me or email me by going to the Contact link at the top. I’d like to get a few more details about your current situation.
November 5th, 2007 at 2:48 pm
I just got off the phone with Countrywide Work Out Program. They said the only way they will NOT damage my credit was if the loans were paid in full. I offered a payoff plan in exchange for good credit. they said “suck it”. Nevada is a 4 month forclosure state, they said “it wouldn’t be too expensive on our end to foreclose”…
basically they are accepting zero responsibility for current market conditions (interest only arms), even to people with mid-700 credit scores like me.
November 5th, 2007 at 5:26 pm
Randy, Countrywide is getting their share of complaints lately for talking a good game but failing to offer anything in the way of tangible assistance for people like you.
From my perspective, Anthony Mozzilo continues to blame the mortgage brokers for everything, but the Countrywide wholesale reps were the first ones to hit my office with the 5 yr fixed pay Option Arms, the worst of the breed as far as I’m concerned. They came through brandishing the highest rebates (think back-end commissions) paid on any loan program, without any understanding of how bad that loan could hurt people. See me prior post on that topic at
http://www.lendingclarity.com/2007/02/10/the-5-year-fixed-payment-option-arm-meeting-the-devil-at-the-crossroads/. I recently ran across a website you might want to view and add your story to: www.countrywidehomeloansucks.com
November 6th, 2007 at 6:48 am
That was all very interesting as we have missed our first mortgage payment-IN OUR LIVES! To Countrywide those unscrupulous lousy bull crapping mortgage company!
ADIOS- Headin here….
http://www.lendingclarity.com/2007/02/10/the-5-year-fixed-payment-option-arm-meeting-the-devil-at-the-crossroads/. I recently ran across a website you might want to view and add your story to: www.countrywidehomeloansucks.com
November 6th, 2007 at 7:15 am
We also missed one payment and soon to miss two, and we also had a loan with countrywide…I trust no one now, no one. We will do a short sale if we do not have to put more than maybe agrand into it, if not, then we will just foreclose, we do not have money, living on unemployment and no healthcare too now.
November 6th, 2007 at 8:39 am
helpmeplease
i think you will have to pay TAXES if you go foreclosure or short sale.
I am so sorry you are living this too
I got bankruptcy for dummies
read every page
to me…bankruptcy is lesser of all evils- please research before you do anything
I am making an appointment with a lawyer- IF we can trust him- we want to hear his advice for our own personal situation
Godspeed
You can hook up with me here:
myspace.com/thebeastwithin
November 20th, 2007 at 1:50 pm
We are in the process of converting from a ch 13 to a ch 7 bk. To add all the months up, we are five months deliquent in our home loan. Loss and Mitigation offered us a payment that is still too high. We are now willing to give up the house with the bk. Do we want to try and do a short sale before the foreclosure process starts? Or should we just live rent free for a while, save money and then move out and move on? I want to do what is best, but without having to paying for a mortgage deficiency or taxes on the short sale difference. If our credit is ruined for a while anyway, does it really help us to list the house and try and sell it? (Our Attorney does not recommend selling, he feels it is not in our best interest, as why would we want to move out faster for free rent.) If you can offer any advice, it would be greatly appreciated.
November 20th, 2007 at 6:38 pm
Ruth,
Since you converting to a Chapter 7, I assume you are technically “insolvent”. That should get you a waiver from the IRS on any tax liability associated with the debt relief. That should also discourage a lender from pursuing a deficiency against you.
I don’t see any benefit to you in trying to sell the house at this point. There may not be enough time left before your lender forecloses anyway. And, as I’ve been saying, from a credit standpoint, it doesn’t make any difference.
Sorry about your financial troubles, and I wish you the best.
November 26th, 2007 at 10:42 am
We met with a realtor this weekend who advised us to do a short sell, and assured us that our credit rating, if the transaction was handled properly who not be affected (I have read MANY things online that support this, and MANY that don’t) so basically I am seriously confused. We want to buy a house again and are moving due to a job transfer, but would be fine with waiting a few years to buy. What is the best option for me that doesn’t ruin us for buying a house? And even if our credit score sinks now, how long does it take to build it back up to where you can get a decent loan? Our realtor also talked about the deed in lieu option and also seemed to think this wasn’t AS BAD as foreclosure–What are my best options??
November 26th, 2007 at 12:53 pm
i wish i knew.. i too, keep hearing conflicting info too!
November 26th, 2007 at 1:03 pm
Amber,
All my research suggests that, if the credit bureaus and lenders find out that you’ve had a short sale, they will treat you the same as if it was a foreclosure or Deed in Lieu. Call it what you want, but if a lender lost money making you a loan, they’ll be reluctant to do it again.
I’ve talked to a couple of real estate agents who claim that there are ways to keep lenders and credit bureaus from knowing you’ve had a short sale, but failing to disclose material facts to a lender is no different than lying: both are forms of fraud.
Fannie and Freddie guidelines are that you’ll need at least two years after a foreclosure to get a conventional loan. Subprime lenders use to allow a short time period, but they’re pretty much gone for now. After the two years, it will be a matter of your credit scores and possibly the reason for the short sale.
November 27th, 2007 at 11:12 pm
[…] I wrote a couple of articles awhile back entitled, Short Sales vs. Foreclosures…Your Credit Will Suck Either Way and Short Sales and Loan Prospector: A Response From Freddie Mac. At the time–nearly a year ago–my preliminary investigation suggested that short sales and foreclosures would have exactly the same effect on credit. But back then, this issue was just reclaiming the spotlight, and no one had really given it much thought. You see, it has been 10 years since we’ve really seen this problem. Those articles are still garnering comments, and I’ve been getting daily phone calls and emails from all over the country from people facing foreclosure. So recently I reopened the investigation. And although the issue is far from clear, my conviction is the same. A short sale won’t leave your credit in better shape than a foreclosure. And it could hurt you from a tax standpoint. […]
November 29th, 2007 at 4:50 pm
I had to close both my mortgage and real estate business at the end of 06. It cost me more money to do business then I made. I live of my money from the VA which pays the bills. I was also thinking of a short sale or foreclosure, however, as an agent for both mortgage and real estate I feel like I know too much. I can tell you that no matter what you do your fico will suffer. As an agent I can tell you that the agent you are talking with is only thinking of their commission. If they made money on a foreclosues they would be telling you to do that. If you walk from you house as I said it will hurt your credit, no question. I wish I have better news for everyone, but we are all in the same boat. I never missed a payment until about a year ago, then worked it out with the lender. I am current now, but broke. I had to pay them everything I had to the mortgage company to keep the house. Now it feels like a bad relationship. You put your heart into it and do that right thing but it is killing you either way.It’s hard to look at your own situation and have a clear head. Staying in the house is a guarantee that you will continue being broke and continue losing more money. How does one make a choice when there are no good choices to pick from? I have 5 years paying on this house with no equity show for it and no hope the market will get better any time soon. It’s quite a quandary. I picked a bad time to stop drinking…..
November 30th, 2007 at 2:30 pm
Tom, thanks for your comments. I was both crying (well, figuratively speaking) as I read it, and laughing (literally) at your parting comment.
Yes, unfortunately it is too often like you’ve been chased into an alley by muggers only to find a brick wall. Only Spiderman gets out unscathed. Allow me to express my admiration for your attempt to do “the right thing” and hang on. Some people have developed a cavalier attitude toward losing their home, and that will fuel legislative concerns about the “moral hazard” in bailing out trouble homeowners.
Oh, and moderate drinking is the way we teach our children to drink responsibly! Don’t quit!
~;>)
December 11th, 2007 at 11:18 pm
From what I am reading, it sounds like a foreclosure is almost always better than a short sale. I live in CA. Therefore, as long as the house forecloses non-judicially, we should not be facing a deficiency judgement if we allow the home to foreclose.
We have been working with our bank and real estate agent for several months to negotiate a short sale. We have an offer on the table (a really crappy offer). The bank today told us it would approve the short sale provided that we agree to pay them $111/month for the next 15 years (tax liens on the property). I told them no deal. The tax liens will get wiped out in a foreclosure and we have tax attorneys working to negotiate these down.
Then the bank came back and said okay. They will allow us to do the short sale without making continued monthly payments. At this point, I do not trust anyone. My agent gave me bad advice by telling me I should accept the bank’s offer to pay them $111/month. She wants her commission. The bank has lied to us continually throughout the process. We may or may not be filing bankruptcy in the next 8 months. I just want out of the house without any deficiency judgment which would most assuredly push us into bankruptcy. Additionally, there is a $35,000 pre-payment penalty attached to our horrible loan. This is something I do not want attached to any “debt forgiveness” (1099-C). I believe with an outright foreclosure the bank would not be allowed to add a prepayment penalty.
I understand the tax implications of both foreclosure and short sale. I believe we will qualify as being insolvent.
I know we should consult an attorney before signing any short sale paperwork but we do not have the money. Is it more advisable for us to just walk away and let the house simply foreclose? Should I push with the real estate broker and get them to pay for the attorney? Has anyone ever heard of that? After all, they stand to gain if the sale goes through but it must go through without leaving us liable for a huge deficiency.
December 13th, 2007 at 12:07 am
I was an investor and currently own a primary residence and two investment properties. I have never been late on a payment and have money in a savings account. I don’t want to lose that money or my primary residence. I can’t afford to pay for the two investment properties anymore and am planning on just walking away from them. How will this affect my credit? I plan on going to school in the next year and a half and am afraid this may affect my chances of getting school loans. I want to just stop paying the mortgages on the two properties but want to continue paying on my current property and to keep my primary residence.
Your help would be truly appreciated. I used to be a Realtor and I appreciate your honesty and knowledge in this topic.
December 13th, 2007 at 2:43 pm
Dear struggling investor: if you let any of your properties go, your credit will be damaged for awhile. I don’t know how it might affect your school loan rates; that’s a really in interesting question.
Since you have some savings (you’re not insolvent) and a home you want to save, I’d recommend to talk with a CPA to explore the tax consequences in your area. There exists two potential tax issues: debt relief and capital gains. I’m qualified only to tell you see a qualified tax person before you decide.
And if you can hang on to your home, then at least you’re not renting, not that renting is such a bad idea in this market.
December 14th, 2007 at 3:29 pm
Mark-I live in Mass and am considering a short sale with the help of a realtor. I owe 290k on the house and could proably sell it for 265k less the realtor fees. Our reason for moving is the neighborhood has gone to pot (drugs etc) and I have small children that I would like to get into a better school district. We are also struggling to meet the mortgage (1 30-day late last year). We have 25k in credit card debt as well. After reading your blog I am wondering if it isn’t more advantageous to file Barkruptcy. I was told our credit wouldn’t be affected by the short sale and we “probably” wouldn’t have an issue with the IRS 1099 thing as congress is passing a bill to do away with that. We have been trying to sell the house for a year and a half with very little action. Our plan is to rent for the next 2 years then get back into the market hopefully. Would you suggest a different route?
December 14th, 2007 at 11:54 pm
I invested in three properties in California as sole and seperate owner. I am married. I may be letting one or two of the investment properties go into foreclosure. Also I live in my primary which is in my wifes name as sole and seperate. I also have savings in an account of my own. Now considering my spouse owns the primary and has savings of her own. what will make me insolvent. Or will the lender attempt to come after my primary which is in my spouses name or will they attempt to come after me through my other remaining properties.
December 15th, 2007 at 10:59 am
Todd, I completely understand and empathize with wanting to get your kids someplace safe. If you are considering bankruptcy, you may be able to avoid any tax liability, but your agent acted irresponsibly if (s)he told you your credit would be unaffected by a short sale. While it is possible that your lender will report it in such a way that your credit scores may not suffer badly, there is no guarantee of this. There is no way to predict how your lender will handle it. In any case, mortgage lenders view short sales the same way they view any other form of foreclosure.
Rod, I don’t know the answer to your question. It is a good one though. I claim only to have information and an opinion about the credit side of things as it relates to your ability to get another home loan. My concern is that California is a community property state; that might give your lenders some access to your joint assets or deprive you of the option to declare yourself insolvent. Talk to an attorney, my friend. You need good legal advice. If you need a referral, send me an email. Where in CA are you?
April 18th, 2008 at 4:52 pm
[…] And what about the so called “rate freeze”? Because of a few short sale posts here at Lending Clarity, homeowners from across the country contact me every day asking for advice because they can’t get their lenders to help them. These efforts on the part of lenders so far are voluntary, so they can easily add their names to the media’s good-guy list without actually doing a thing to help anyone. And that seems to be the reality so far. […]
April 19th, 2008 at 7:29 am
Sorry folks. This post has over 140 comments with interesting personall stories and insight by many. A few days ago, the server that is home to Lending Clarity was hacked and the site taken down. We are rebuilding and trying to bring back all those comments. Keep checking in. Thanks
April 30th, 2008 at 11:34 am
Hi Marc, I was hoping you could also advise me.. All the talk about foreclosure and short sale is getting more and more confusing. With the current market situation, what do you think is a homeowner’s best option? To foreclose or short sell? If they go into foreclosure on a primary home in CA, would they still get a 1099?
May 6th, 2008 at 1:45 pm
Mariel,
I think homeowners ought to try to work with their lenders first. Most are finding their lenders unwilling to do much to help. If it becomes a question of how to give up the home, it seems to make more sense from the homeowner’s standpoint to just let the home go to foreclosure.
From a credit standpoint, it’s best to confine your late payments to the mortgage and not to use credit cards to stay current on payments. That’ll force you into bankruptcy which will have a bigger impact on credit.
Stay tuned to Lending Clarity. There are new credit implications emerging that will affect all homeowners in the future. I’ll be writing more about those. Go up to the top left of the page and enter your email address in Email Blog Blast for updates when I post.
Thanks and good luck!
Click th
May 8th, 2008 at 9:36 am
Currently I have a 1st and a 2nd on my Arizona property. I have filled out the lost and mitagation packets for both. If my 2nd does not want to deal with me and decides to foreclosure, do I lose the house and have to move? Or is that only if the 1st forecloses?
May 8th, 2008 at 9:37 am
Currently I have a 1st and a 2nd on my Arizona property. I have filled out the lost and mitagation packets for both. If my 2nd does not want to deal with me and decides to foreclose, do I lose the house and have to move? Or is that only if the 1st forecloses?
May 8th, 2008 at 5:04 pm
Cynthia,
Either lender can foreclose if you are in default of their loan. You always have the opportunity to bring the loan current, but if you cannot do that and if they won’t help you out, you’re probably going to lose the house
July 11th, 2008 at 5:17 am
Hello Marc,
I currently have a condo in Michigan that I am renting out because I am unable to sell it. I have a real estate agent setting it up for a Short Sale now. He stated that a Short Sale would not affect my credit as much as a foreclosure would. He also stated that if I do foreclose, there is a chance that the bank could come back later and sue me for the balance. Is this true?
July 14th, 2008 at 8:04 am
Craig,
There is a lot speculation and uncertainty surrounding these issues, and Realtors have an ax to grind–they make a commission on a short-sale and they get nothing on a foreclosure. Short sales are also very difficult and most buyers in here in Sacramento CA don’t pursue them.
Banks here are subject to a “single action” rule, which means they can choose either to sue for a deficienty judgement or foreclose and take the property. They seem consistenly to elect the second option, although if you have a 1st and a 2nd, the second lien holder could still sue even if the 1st doesn’t.
I don’t know what recourse is permitted by the laws of Michigan, but you need to get some qualified legal and tax advice before you make the decision. I try to confine my comments to the effect on your credit of one or the other. Recently, Fannie Mae announced that it would consider you for a mortgage two years after a short sale but five years after a foreclosure, subject to credit scores at the time. That suggests that from a credit standpoint, a short sale may be preferable.
Good luck, and sorry about your troubles.
July 15th, 2008 at 12:47 pm
Marc
I have a 1st and 2nd mortgage as well a Heloc loan with the same lender that holds my 2nd mtg. If I foreclose am I respondsible for paying off the heloc loan after forclosure (we did open the Heloc after we purchased the home ?)
cynthia
July 22nd, 2008 at 12:52 pm
I have a 1st and a 2nd mort. as well as a heloc loan with the same lender that holds my 2nd mort. If I foreclose am I still responsible for paying off the heloc loan (we did open that after the purchase of the home) or is that considered part of the foreclosure?????
July 28th, 2008 at 4:15 pm
Marc,
Wife & I are in a similar boat (make it a life boat) to the folks at postings 48 & 49 above…
1-We have a 1st Mtg. (down to $156k fm 168k originally, been slapping extra toward principal every month, for YEARS…for now apparently nothing?)w/Countrywide (&we are current, so dealing w/customer service means INDIA right now)
2-We have a HELOC 2nd also thru CW, for $73k, which they “froze” in Feb., we’ve tiled, added hardwoods, redone the kitchen & baths, crown molding, the works. We moved 2+ yrs ago when we had it under contract, however that 1 fell thru, & ZERO have followed (no offers, no lookers). This past friday, both my RE Agent & Appraiser tell me “The house might be able to get sold for around “$150k…..maybe?”….I just stared at them in dumb shock. Last appraisal had been $249k, & that was early ‘06.
I wanted CW to simply WRITE OFF the 2nd & do a short sale on the 1st, suffering a minimal loss, of course that set as well as an alligator in an elevator with them earlier today…
So now I want to deed in lieu of foreclosure the place back to them. If they want to be idiots and inherit MORE REO…so be it. I was willing to even hang in there paying the 1st (& paying it down), however they blew me off. Now the wife is pissed and wants out…wants to know who we send the keys to, where we sign, they can have it good riddence to stupid “negotiators”. Contact an attorney? Our Accountant? What are our ramifications w/the HELOC if we simply send them “jingle mail” (Deed in Lieu completed & notarized paperwork while still current & the KEYS)?
Please keep in mind we HAVE our dream house for now and plan on staying here at least a couple years to come…credit, schmedit, I’m a mortgage broker & have been for a decade, never wrote a single POO Loan, never a Neg.Am loan, (& probably still have a license because I walked away from a TON of potential mort.fraud at every turn in ‘05, ‘06, & ‘07)& have zero regrets, just never thought we’d get caught in this mess along with all the other refugees out there…at least we have another home, it is mind boggling to have had a place that was worth $249k, to have added $60k in costs for materials to IT, and now it be worth less than before the hundreds of hours and all those materials? I’m over it, I just want to be sure they can’t pursue us via judgment in Florida for the HELOC?
August 10th, 2008 at 4:15 pm
Marc,
We are in the same boat as many. We own a home in CA but live in TX. We currently have a renter in the home in CA but our (bleep) lender just increased our rate by 1.50% and it’s now 9.25. This increased our payments to just under $3k/month and we are having to cover a little more then half of the mortgage. We are barely keeping our head above water and are considering walking away from the house when the renters lease is up in two months. I’m not one of those greedy LL that collects the rent for 6 months without making a mtg payment and leaving the renters homeless.
We owe $324k and it appraises for $220k (ouch I know) We also have about $20k in cc debit. What do you think would be best for us to do? Just foreclose or file bankruptcy? Which is “better” on your credit and will give us a better chance on buying again? Do I have to pay taxes if we foreclose? Also, if we do foreclose when do we stop paying the property taxes and is it possible to get the money back from the lender that is in my escrow account?
Thanks!
October 21st, 2008 at 4:14 pm
A short sale is not a foreclosure. A short sale generally hit credit for as many late payments that happened before the home sold. A person can recover from a short sale.
A foreclosure is a permanent red mark that can keep a person from EVER being a home owner again.
October 21st, 2008 at 4:16 pm
… also, in the current market (which is MUCH different from when this post was written), lenders may work with an owner so that they (sellers) are not liable for the deficiency. Not so with a foreclosure … unless a bankruptcy is in play.
November 8th, 2008 at 3:48 pm
Mariana, short sales during the 1990’s recession were viewed exactly like a foreclosure from a credit standpoint. That was before we began using credit scores. As the recent crisis built, that old experience was the only precedent we had to work with.
There is an emerging but subtle distinction this time around. While Fannie Mae has increased to 5 years the elapsed time required between a foreclosure and and a new mortgage, it will consider a new mortgage after only 2 years for a short sale. Freddie Mac has not yet followed suit that I’m aware of.
There is also some suggestion that the credit scoring models may be more lenient toward short sales. Some of the claims I’ve heard made about foreclosures being harder on credit scores may be because people often get further behind on the mortgage, triggering a Notice of Default (NOD)and then running up credit cards and occasionally filing bankruptcy. The worse the accumulated damage, the lower the scores will fall.