A short sale’s effects on a homeowner’s credit score might be similar to that of a foreclosure, because lenders typically incur a significant reduction. However, short sales have a small advantage because future creditors will generally look upon it more favorably than a foreclosure since it reflects upon the borrower’s willingness to cooperate and work out a solution together with the lending company. Still, struggling borrowers should consider the rest of the alternatives available in the creditor before resorting to a short sale or a foreclosure.
Lender Options
Borrowers should make an effort to work out an answer with their creditor before resorting to a short sale or a foreclosure. Borrowers with sufficient equity in their house can attempt to refinance at a lower rate or sell the property to cover their mortgage loans. Otherwise, lenders have a number of choices available to borrowers, such as loan and repayment modification programs. These options can help borrowers afford their mortgage obligations, keep their charge undamaged and stave off foreclosure.
Short Sale Credit Effects
A short sale occurs when the property comes at a price below the loan balance. Short sale discussions generally do not start until 6 months following the first missed payment along with all other options are exhausted. Be aware that a short sale does not appear like a”short sale” on the credit report. Instead, how it is documented could be negotiated with the creditor. Normally, the lending company will report the short sale as a”settled” account, meaning the creditor has agreed to take a portion of the loan balance as repayment. Still, the creditor has incurred a loss and this will inevitably make the borrower’s credit ratings to drop.
Foreclosure Credit Effects
The foreclosure will begin to look about 90 days after the first missed payment (30 days in some states), even though borrowers might request the creditor to remove this mark following having a successful short sale or deed-in-lieu (borrower voluntarily relinquishes ownership to the lender). Be aware that it is in the best interest of the creditor and the borrower to prevent a foreclosure. According to the Federal Deposit Insurance Corporation (FDIC), a creditor stands to lose roughly $50,000 per foreclosure. Meanwhile, defaulting borrowers endure a hit of about 300 points in their credit score, along with the foreclosure will remain in their credit report for another 7 decades. The time frame of the foreclosure procedure can range from 6 months to over a year, based on state law. The California Foreclosure Prevention Law requires all creditors to deliver an extra 90 days in addition to the time stipulated in a notice of sale before they could proceed with a foreclosure auction sale.
Deficiency Judgment
A short sale and also a foreclosure both generally result in a reduction for the creditor. Some states will allow the creditor to pursue the borrower’s other assets to treat the deficiency in a procedure known as a deficiency judgment. However, nonrecourse states, for example California, prohibit deficiency judgments against borrowers, in the event the creditor’s only path of remedy is to reclaim the underlying collateral (the house). Be aware that in California, purchase money loans are generally nonrecourse. Buy money loans are funds used to buy an asset, such as a house. That is an important distinction, because refinance loans can be subject to a deficiency judgment in nonrecourse states such as California.
Taxes
Any debts discharged through a short sale or foreclosure are regarded as taxable income by the IRS. However, the Mortgage Forgiveness and Debt Relief Act allows defaulted homeowners to exclude up to $2 million ($1 million if married and filing separately) of canceled debt from income. Be aware that this provision only applies to discharged debts associated with principal houses.