How Foreclosure And Short Sale Affect Your Credit

"Credit is often one’s first concern when they face foreclosure or consider a short sale. That’s perfectly understandable considering the importance we put on credit these days, from getting a credit card to buying a home or car. And when hard times strike, it’s only natural for a homeowner to want to save his credit. But how do you know how you’re your credit will suffer? Below are some of the most common questions on foreclosure and short sale credit impact, and what you can do about them.


How Will It Affect My Credit Score?

In either short sale or foreclosure, the reduction in credit score is a combination of your default and the sale itself. Generally, the losses are much lower in a short sale—some 100 to 300 points (sometimes less) compared to as much as 400 in a foreclosure. The further behind you are at the time of the foreclosure or short sale, the more your credit score will drop as a result.
How Long Does It Stay On Record?

In most states, a foreclosure stays on your credit report for up to ten years. Short sales can stay as little as two years or as much as seven, depending on your lender’s policies and the terms of the sale. One advantage to short sales is that you can negotiate with your lender as to how it will be reported, and if you get a good deal, you may even get them to remove the record sooner.

How Soon Can I Buy A New Home?
The law varies by state, but generally, you have to wait around 5 years after a foreclosure before you can buy a new home. Short sales have a wait time of two to three years, depending on who owns your mortgage. Fannie Mae allows you to buy a home after two years with a certain required down payment; this requirement is lowered the longer you wait to buy. If you did not have a 60-day default when you sold off your home, you can even buy a home immediately afterwords.


How Will It Affect Future Credit?

A foreclosure usually comes with a disclosure agreement which requires you to mention the event when you apply for another mortgage. Mortgage applications usually have a section where you have to indicate whether or not you’ve gone through a foreclosure or similar transactions, and this will affect the lender’s assessment. This happens less frequently in a short sale."

Short Sales and REOs: What’s The Difference?

"The troubled real estate market has led to an influx of distressed homes, which now make up as much as half of the inventory in some areas. Thanks to the attractive prices being offered, many buyers are snapping up homes they would otherwise not have considered. Unfortunately, not many of them really understand what they’re getting into. For instance, what’s the difference between a short sale and an REO—the two most popular types of distressed homes today? Here’s a quick guide to help you better understand your choices.



Short Sales and REOs

A bank short sale is a home that’s priced below the seller’s mortgage balance, because the balance exceeds its current market value. Banks agree to short sales because the only alternative is often foreclosure, which will cost them even more. REOs, which stand for real estate-owned, are homes that have gone into foreclosure but have been repossessed by the bank because they failed to get bids at the auction. Both are sold at significant cuts and are listed on the MLS just like non-distressed homes.

Selling Prices

A short sale is limited by the seller’s outstanding balance; it cannot be priced more than what is owed. Generally, a bank short sale sells for 85% to 95% of the market value, although some can sell for as low as 60%. REOs are priced according to market values as well, but banks can also take into account any repairs they’ve made prior to listing. Since banks sell REOs solely to get the property off their books, they are priced to sell fast and often offer good deals compared to a bank short sale.

Buying Process


This is probably the biggest difference between an REO and a short sale. In a short sale, the buyer makes an offer to the seller, but it’s forwarded for the bank for approval. The lender has the final word on whether or not the bank short sale can push through. An REO, on the other hand, is sold much like a regular sale, with the bank acting as the seller. They usually take faster because the bank is much more willing to sell.
Where To Find Homes


One can find a bank short sale or REO on the MLS and other mainstream listings, but they can be hard to distinguish from regular homes. Laws have yet to be passed requiring the identification of short sales and REOs. Until then, the best way to find a bank short sale is to look for wording that says a “third party,” meaning the bank, has to approve your offer. REOs can also be found in banks’ private listings, which are usually available on their websites."

5 Facts About Bank Short Sales

"Bank short sales have been well publicized as a way out of foreclosure, or even a shortcut to financial stability. But while it has helped thousands of homeowners, the bank short sale process isn’t as simple as it seems. Before taking the plunge, it’s important to know how bank short sales work and what results to expect. Here are some facts every seller should know before opting for a bank short sale.

Buyers Can Still Back Out

Bank short sale buyers are not required to commit to any properties. So even if you’ve taken their offer to your lender, they can still walk out of the sale if they find a better deal elsewhere. The best you can do is show your willingness to sell your home and complete your documents so that the sale moves forward faster.

Short Sales Affect Your Credit

Credit scores will fall after a short sale, both as a result of missed payments and the bank short sale itself. The good news is that it’s much less damaging than a foreclosure. Bank short sales can take 80 to 100 points off your credit score, while foreclosures can slash it by as much as 400.
You May Still Owe Money Later

After a bank short sale, there’s a difference between the amount the home sold for and the balance you still owe. Your lender will either forgive this amount or go after it in a deficiency claim. Most will only do the latter if you have any assets you can pay it with. More commonly, they will simply give you a 1099 form stating the amount of canceled debt. The IRS will record this as income and impose the appropriate taxes.
You Can Get Tax Help

If you’re worried about the tax consequences of a bank short sale, you may be covered by the Mortgage Debt Relief Act of 2007. This exempts short sale sellers from any tax dues on forgiven debt for incomes of up to $2 million. You are also protected from taxes on bank short sales if you were insolvent at the time of the sale.



You May Have To Wait To Buy A Home

Most bank short sales have a 2-year waiting period before the borrower can get a new mortgage. For Fannie Mae mortgages, the longer you wait, the lower the minimum down payment will be. However, if you were not in default at the time of the bank short sale, you can apply for a new mortgage immediately after closing."