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Short Sale vs Foreclosure in Sacramento

The answer boiled down to credit implications, deficiency judgments, debt cancellation tax, and challenge to employment.

•           *****Credit Impact******. Foreclosure can remain on the homeowner’s credit for up to seven years while a short sale usually gets reported as a “settled debt” and is significantly less damaging.  Credit experts say that a foreclosure may reduce a borrower’s FICO score by 250 to over 300 points while a short sale may be as little as 50 points if all other payments are being made.  How much of an actual hit on your credit score will depend on the credit beaureau’s proprietary algorithms.

•           Deficiency Judgment. Regardless of foreclosure of short sale, lender has the right to pursue a deficiency judgment against the borrower and attempt to collect the amount that was short.  With a short sale, however, it is possible to negotiate with the lender to eliminate a deficiency judgment. Additionally, in a properly managed short sale, the price sold in almost all cases will be better than at a foreclosure auction or as a bank owned property, resulting in a lower deficiency.

•           Debt Cancellation Tax. Regardless of foreclosure or short sale, debt cancellation and its related tax consequences are treated the same way.  Unless the homeowner qualifies for the exemption under the Mortgage Forgiveness Debt Relief Act of 1007, he will be required to claim the ‘canceled’ or ‘forgiven’ debt as income for the year.  To qualify for the exemption, the debt must be incurred to acquire a principal residence and be less than $2 million.

•           Challenge toEmployeement. Employers have the right and are regularly checking the credit of all employees in sensitive positions.  A foreclosure in many cases is ground for immediate reassignment or termination.  Many employers require credit checks on all job applicants.  A foreclosure is one of the most detrimental credit items an applicant can have an in most cases will challenge employment.  Short sale on the other hand is often reported as debt settled and therefore not a challenge to employment.

For a more detailed comparision of consequences, please click here.

*********Credit Impact**********

How will late payments affect my credit score?

Your history of payments is the largest factor in your credit score.  The extent of how late payments affect your credit scores depends on how recent the late payments are, how severe the late payments are, and how frequently the late payments occur.

Typically, creditors report late payments in one of these categories: 30-days late, 60-days late, 90-days late, 120-days late, 150-days late, or charge off (written off as a loss by the lender). Of course a 60-day late is worse than a 30-day late, but the important thing is to avoid having your account going so delinquent that the creditor sells your account to a collection agency or it becomes a judgment.  Once done, you’ll have a significant negative event on your record and you can never again bring that account current.

How will refinancing and mortgage modification affect my credit score?

The extent of how they affect your credit scores depends on whether it’s reported to the credit bureaus as the same loan with changes or as an entirely new loan.  If it’s reported as the same loan with changes, then the impact on your credit score should be minimal and are as a result of the credit inquiry, changes to the loan balance, and changes to the terms of that loan.  If it’s reported as a “new” loan, your score will experience the additional impact of a new credit obligation.

How will short sale and deed-in-lieu affect my credit score?

The extent of how they will affect your credit scores depends on the outcome of your negotiations with the lender as to how they will report it to the credit bureaus.  Their reporting can range from “not paid as agreed” or “not satisfied” to “settlement in full” or “full satisfaction”.  Some experts believe that the number of late payments is the only impact; while others indicate that the credit bureaus have adjusted their model to make them more negative.

How will foreclosure impact my credit score?

Foreclosures are considered a very negative event to your credit score.  A foreclosure remains on your credit report for 7 years, but its impact to your credit score will lessen over time. The important thing to remember is that a foreclosure is a single negative item, and if you keep this item isolated, it will be much less damaging to your credit score than if you had a foreclosure in addition to defaulting on other credit obligations.

How will bankruptcy affect my credit score?

Bankruptcies tend to involve several accounts and thus have the potential to have a more far reaching negative impact on your credit score than an isolated foreclosure.

A bankruptcy is considered a very negative event. As long as the bankruptcy is listed on your credit report, it will be factored into your score. The individual accounts included in the bankruptcy should be removed from your credit report after 7 years.  While the public records item for Chapter 7 will remain on your credit report for up to 10 years while Chapter 13 will remain for up to 7 years.

How will public records affect my credit score?

Public records such as bankruptcies, judgments and tax liens are considered adverse by the credit bureaus. Your score can be affected by the mere presence of an adverse public record, whether paid or not.  They can remain on your credit report for up to 10 years based on what type of public record it is.

With your financial future on the line, you need a specialist!  I urge you to contact me today if you think short sale might be right for you.  I will contact you right away to discuss your situation in strict confidence.