When consulting sellers about various alternatives to foreclosure, (such as a short sale) I am often asked if a short sale is a better than a foreclosure where credit scoring is concerned. The short answer is no, but there are several other factors to consider when advising your clients about a short sale vs foreclosure.
As mentioned above alternatives to foreclosure (i.e. short sales and deeds-in-lieu of foreclosure) are all weighed the same by FICO. They are reported as debt that is not “paid as agreed” and therefore are scored the exact same way as an actual foreclosure. According to FICO (Fair Isaacs Corporation) here is how they score various delinquencies:
· 30 Days Late – 40 to 110 Points
· 90 Days Late – 70 to 135 Points
· Foreclosure – 85-160 Points
· Short Sale – 85-160 Points
· Deed-in-lieu – 85-160 Points
· Bankruptcy -130 to 230 Points
The benefits of short selling vs. foreclosure.
· The wait to buy another home is shorter. Fannie Mae, Freddie Mac and the FHA determine lending guidelines for mortgages. If a job loss, loss of income, illness or some other detrimental event had an effect on your ability to pay your mortgage and subsequently lead to a short sale or a deed-in-lieu of foreclosure the wait is typically only 2 years as opposed to 7 years after a foreclosure.
· Immediate eligibility to purchase. Current Fannie Mae guidelines may allow the purchase of another home immediately. Even though the guidelines are on the books finding a lender who will fund this kind of loan is extremely difficult. For guidelines on purchasing immediately after a short sale I recommend that your clients consult a reputable lender who has successfully funded this type of loan.
· Your client shows that they are responsible. From a lender’s prospective a short sale or deed in lieu of foreclosure demonstrates that even though you had a life event that prohibited you from paying as agreed you didn’t just walk away from your home. You worked with the bank to liquidate the property in a responsible manner.
· Money to relocate. The HAFA (Home Affordable Foreclosure Alternatives) program offers money for relocation expenses to borrowers who short sell their homes. If the homeowner qualifies HAFA pays $3000 in relocation expenses.
The bottom line is that any liquidation of property without paying the full balance is not going to be good in terms of credit ratings. When making a decision on whether to short sell a home your clients should consider their entire financial picture and all of the options available to them.
This article is from inmanNews.