Among the many solutions available to you if you are facing foreclosure is a short sale. People and companies that promise a quick foreclosure often don’t tell you about the damage a short sale will do to your credit report. A foreclosure will stay on your credit score for 10 years, and you typically have to wait 2-4 years before you can apply for any loan that offers a reasonable rate. The truth is, there is no credit score advantage to a short sale over a foreclosure. Both options will lower your credit score by 200-300 points. That means if you had a FICO score of 700, it can go down to 400 depending on the overall condition of your credit. A short sale will have the same effect on your credit report as a foreclosure. The short sale will show up as a pre-foreclosure redemption status and will cost you 200-300 points on your FICO score. A deed in lieu of foreclosure will affect your credit just as severely as a foreclosure.
A landlord might consider letting their home go into foreclosure because it allows them to stay in the property, basically rent-free, for four months to a year before being forced to evict. But that fact doesn’t mean a foreclosure is the best option because a short sale has the same effect on your credit. Another problem with a short sale or foreclosure is that the canceled debts are considered income by the IRS. So, if you have a $250,000 mortgage on your home and it is foreclosed or discharged in bankruptcy, the IRS treats you as if you received $250,000 in income. Similarly, in a short sale, the difference between the mortgage and the price the lender agreed to sell it for will be considered a forgiven debt, and you will pay tax on that amount. You can often trade that down to a lower level, but it’s a difficult process.
Contrary to popular opinion, short sales do not have shorter waiting periods than foreclosures before a person can buy another home. Fannie Mae’s guidelines state that people need at least 24 months of “seasoning” before they can be considered for home loans. Additionally, a seller could be the victim of a deficiency judgment where they will be liable for the difference between the mortgage amount and the short sale price. It is up to the lender whether or not he will pursue a deficiency judgment.
If you want to save your credit and possibly keep your home, you should explore other foreclosure solutions. For example, if there is enough equity in the house, a real estate investor may be willing to bring your payments up to date if you agree to sign the deed and rent the house to you. He will lose the property, but he will continue to live in the house and, once the difficulties pass, he will be able to buy back the investor’s house or a new house. The key to this is finding a reputable real estate investor through a local real estate investing club. If a homeowner finds a real estate investor, and the circumstances are right, he or she can stay in their home and save their credit entirely.
