July 9th, 2010 3:30 PM by Dave Gubler
Some observations regarding the credit advantages of doing a short sale vs. allowing foreclosure:
Credit is a complicated thing. Most people take it to mean your credit score(s). This is definately an important aspect of credit. There are other ways to consider it though. Let me give you an example. One specific way that a short sale is superior to a foreclosure is with regard to your future ability to obtain mortgage financing. Fannie Mae and Freddie Mac (approximately 50% + of all mortgage loans) require a potential borrower to be 2 years out of a short sale to consider said borrower for financing. They both require a potential borrower to be 5 years out from foreclosure to consider a borrower for financing. These guidelines are regardless of a potential borrower's credit scores. Foreclosure prolongs your ability to obtain Fannie or Freddie mortgage financing for an additional 3 years!This is just one example of a clear cut benefit of short sale over foreclosure and while it does not pertain directly to the credit scores it certainly does pertain to "credit"
Another way in which a short sale is clearly superior: Short sale provides you an opportunity, if your Realtor fights for it, to modify how the bank reports your delinquency to the bureaus. In a foreclosure there is no representation and no give-and-take from the bank so they report it as foreclosure and scores are impacted as such. A good short sale agent will fight for your interests and negotiate with bank representatives to report a short sale in the mildest fashion possible. Does it always work? Certainly not; but it works often enough that I would say doing a short sale (at least the many I have participated in) provides a clear "credit advantage" over foreclosure. At least you have the opportunity to modulate how the bank reports rather than simply accepting the foreclosure they will report if you go that route.The trouble is... many agents are only concerned with getting the deal done and getting their commission. A good short sale agent will attempt to negotiate many of the finer points of the transaction (waive deficiency judgments, lower short payoff amount, no 1099, etc.) to your benefit. Are we always successful on every point? No, of course not but at least you get your "day in court" as it were.
Dave Gubler / IML Real Estate
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