Dean Williams By:


Among the many solutions available to you if you are facing foreclosure is a short sale. Individuals and companies that promise fast foreclosure help often fail to inform you on the damage a short sale will have on your credit report. A foreclosure will remain on your credit score for 10 years and you’ll 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 of these options will lower your credit score between 200 to 300 points. That means if you had a FICO score of 700, it may drop to 400 depending on the overall condition of your credit. A short sale will have the identical effect on your credit report as a foreclosure. The short sale will show up as a pre-foreclosure redemption status, costing you between 200 and 300 points on your FICO score. A Deed-In-Lieu of Foreclosure will affect your credit just as badly as a foreclosure.

A homeowner might consider letting their home go into foreclosure because it enables them to stay in the property, basically rent free, from four months to a year before being forced to vacate. But that fact does not mean a foreclosure is the better option because a short sale has the same effect on your credit. Another issue with short sale or foreclosure is that discharged debts are considered income according to the IRS. So if you have a $250,000 mortgage on your home it is foreclosed on or discharged by bankruptcy, the IRS treats that as if you received income of $250,000. Likewise, in a short sale the difference between the mortgage and what the lender agreed to sell it for will be considered forgiven debt, and you will be taxed on that amount. You can often negotiate that down to a lower level, but it is a tough process.

Contrary to popular opinion, short sales do not have shorter wait periods when compared to foreclosures before an individual can buy another home. Fannie Mae guidelines state that individuals need at least 24 months “seasoning” before they can be considered for home loans. Additionally, a seller could fall victim to a deficiency judgment where they will be held liable for the difference between the mortgage amount and the short sale price. It is up to the lender as to whether or not they will pursue a deficiency judgment.

If you wish to save your credit, and possibly keep your home, you should explore other foreclosure solutions. For instance, if there is enough equity in the home, a real estate investor may be willing to bring your payments current if you agree to sign over the deed and rent the home from them. You will lose ownership, but you’ll continue living in the home and once your hardship passes you may be able to repurchase the home from the investor or a new home. The key to this is finding a reputable real estate investor through a local real estate investment club. Should a homeowner find a real estate investor, and the circumstances are right, he or she may be able to stay in their home and salvage their credit altogether.

Foreclosures are not a pleasant experience and you probably want to end this misery as soon as possible. The best way to do this is not to stick your head in the sand! Start taking action and save your home.