There has been a huge shift in real estate values leaving many folks underwater on what they owe a lender vs. current market value of their home. There are some options for those that cannot afford to continue to pay mortgages, while others with stable jobs should consider a loan modification. You can find out more about loan modifications at a recent post - Hope Now . There is a self-assessment tool to see if you are eligible for one.
Please realize that you are not alone in this situation and reach out for help – education is key, and caution is critical as there are many out in the marketplace to take advantage of desperate homeowners seeking loan modifications . If your situation will allow a loan modification, this will most likely be your best option to save your credit and home. Contact your lender(s) immediately – you don’t need a paid service to do this and many lenders have streamlined the application process.
Take a moment and watch this important video from the Federal Trade Commission.
If you are in a financial situation where you cannot make your mortgage payments due to job loss, financial difficulties, or other hardship a short sale may be one option. You should consult an Attorney, CPA, or appropriate professional for your individual situation, and if a short sale would be in your best interest. Only they can advise you of this choice after careful consideration of your individual financial situation – don’t rely on a Real Estate Agent or Short Sale expert for advice.
Excerpt from Fair Isaac Corporation.
If you feel that you aren’t going to be able to make your mortgage payments, take action. Seek advice from a certified credit counselor, speak to your lender, research your refinance options – or do all three. The worst thing is to ignore the problem and continue missing payments; this has the double whammy of hurting your credit standing (leaving you with fewer options), and also putting your home at risk of foreclosure. Here are some helpful tips for avoiding foreclosure from the U.S. Department of Housing and Urban Development.
There are is a bunch of misinformation on the effect of a short sale vs. foreclosure on your credit score, or FICO. I would suggest that you visit www.myFICO.com which is hosted by the Fair Isaac Corporation who originated FICO scoring. Below are several questions and answers regarding the impact of short sales on credit from their website.
Are the alternatives to foreclosure any better as far as my FICO score is concerned?
The common alternatives to foreclosure, such as short sales, and deeds-in-lieu of foreclosure are all “not paid as agreed” accounts, and considered the same by your FICO® score. This is not to say that these may not be better options for you from a financial perspective, just that they will be considered no better or worse for your FICO score.
If you are considering bankruptcy as an alternative to foreclosure, that may have a greater impact to your FICO score. While a foreclosure is a single account that you default on, declaring bankruptcy has the opportunity to affect multiple accounts and therefore has potential to have a greater negative impact on your FICO score.
How does a foreclosure or short-sale affect my score?
Credit bureau reports are limited in how they represent foreclosures today, so it’s generally not possible to tell from the credit report if a reported foreclosure is a short sale, deed in lieu of foreclosure, settled account, regular foreclosure, or some other variation.
The FICO® score treats all of these descriptions that appear on credit reports as serious delinquencies, so they have an impact on the score similar to the impact from a charge off, tax lien or account included in bankruptcy.
Finally, take a moment to read the following question and answer.
A short sale is putting your home on the market, finding a willing buyer, and presenting the offer to the Lender(s) to see if they will approve being paid less than they owe. The process is time consuming, and many short sales are not successful due to uncooperative banks, homeowners that don’t qualify for hardship, or the foreclosure process. Using an inexperienced real estate agent is also a reason for short sale approval failure.
Continue to Part 2 of Considering a Short Sale
Thanks Jeffrey for the article and web resources. I really like the information on the Hope For Homeowners site and am I am going to do the self assessment to see if I qualify for a loan modification. You are right that we must do something to save our homes or to move on. Thanks again, Mark
[...] Part One we discussed what a short sale is, and what the possible effects are to your credit (FICO) score. [...]
Bankruptcy does offer folks who have hit on hard times a fresh start. Put aside any thoughts of being labeled as an outcast, or having your name published. No one needs to know, other than the folks directly involved. Consulting with a bankruptcy lawyer will begin to ease your mind almost immediately, because the advice you receive will be unbiased and geared to your individual situation. Perhaps Chapter 7 or Chapter 13 bankruptcy are not what you require. Debt consolidation and counseling may the solution.
Bankruptcy is one possible recourse but should only be considered after you have consulted an attorney that specializes in them. As the comment indicates above they can also see if debt counseling or a loan modification may be an option. There are many out there offering services so please be sure to ask for recommendations before selecting someone to advise you. Bankruptcy will certainly impact your credit score for some time.
Bankruptcy is one possible recourse but should only be considered after you have consulted an attorney that specializes in them. As the comment indicates above they can also see if debt counseling or a loan modification may be an option. There are many out there offering services so please be sure to ask for recommendations before selecting someone to advise you. Bankruptcy will certainly impact your credit score for some time.