Q & A on Short Sales | Part 2
Continuing our mini series on Short Sales, I will now explain how a short sale will affect one’s credit among other topics.
- A short sale will drastically affect your credit score similar to that of a foreclosure.
- Expect a 200 to 300 point hit in your FICO. However, in most cases there is much less of a point reduction in your FICO in a short sale. A lot of this has to do with the amount of negative reporting history recorded by the lender.
- There is usually a lot less negative history reported in a short sale because the property is sold before the foreclosure.
- The key to retaining the most points in your score is to settle all bad debts and negative reporting activity as soon as possible.
What is the advantage of a short sale as opposed to foreclosure?
- The advantage to a short sale is that it usually does not cost you any money and the lender pays for all the real estate fees and closing costs.
- Your FICO score might not be affected as badly in a short sale.
- You will also be eligible by Fannie Mae guidelines to qualify for a loan at a reasonable rate after 24 months where it could take 5 to 7 years with a foreclosure.
How does a short sale work?
- A real estate agent will list your property subject to the lender’s acceptance of the deficiency or loss.
- They will obtain the highest possible price for the property and submit everything with the short sale package to the lender. You will be able to live in the property during the short sale process.
- It is extremely important to hire an agent that has short sale experience and who is very knowledgeable on short sales and negotiations with the lenders.
- Because property owners cannot by law receive any compensation in a short sale, they tend to use anyone to facilitate this process.
- The short sale is only an advantage if it is done successfully and as quickly as possible. Only use someone who is going to have the best possible chance of getting the short sale approved.
Short sales on investment and income properties?
- Since the 2007 Debt Forgiveness Act does not apply here, it is extremely important to hire a professional to represent the short sale.
- It is in the property owner’s best interest to obtain the highest possible amount for the property. If you are going to be 1099 on the loss, you want to make sure the loss is as little as possible.
- It is also important for the agent that represents you to try and negotiate the release of a deficiency judgment, where the lender sues you for the deficiency or loss.
*** It is best and highly advised, to contact your CPA to get all the information for your particular case and tax liability and filing information.
If you have any further questions on short sales, contact our office at 714.283.6649.