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          Home Foreclosures

          Foreclosures, Short Sales, and Credit Scores

          Chuck Marunde by Chuck Marunde
          July 21, 2009
          Reading Time: 2 mins read
          0 0
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          What effect does a foreclosure or a short sale have on your credit score? Negatives on a credit report are scored by three factors: recency (how recently did the negative event occur), severity (how late is the payment) and frequency (how many times you’ve been reported delinquent on credit obligations). If you have payments in default on a mortgage, your credit score is taking some hits, but if you have a foreclosure, you will not be able to get a Fannie Mae or Freddie Mac backed loan for five years.

          If you have a home for sale that is threatened by a possible foreclosure, you may have to try to sell it for less than the current mortgage balance. If your mortgage company accepts less than what is owed, that is a short sale. Trying to do a short sale is not for the inexperienced homeowner or the inexperienced real estate agent. It’s very technical, and you don’t want to screw it up.

          Lenders prefer short sales over foreclosures because they net more from them. Foreclosures incur additional legal costs and fees, carrying costs, and marketing costs. Your credit score is downgraded with a short sale, but not as much as a foreclosure.   Borrowers can be considered for loans following a short sale after 24 months, if the sale was caused by extenuating circumstances outside of a borrowers’ control, or 48 months if it was the result of financial mismanagement on the borrower’s part of the homeowner.

          There are potential tax implications with a short sale.   The IRS code penalizes you if you do a short sale by taxing you on the forgiven portion of the loan, the difference between what you owed and what the mortgage company accepted in the short sale. It’s hard to believe that our government would tax you on a short sale when you are already in severe financial hardship, but who said our tax code was fair?

          Because of public outcry, congress made an exception to the IRS code. The Mortgage Forgiveness Debt Relief Act of 2007 and the recently passed Emergency Economic Stabilization Act allows you to exclude up to $2 million of income ($1 million if married filing separately) from debt that’s discharged through mortgage restructuring, or that’s forgiven in connection with foreclosure, for the years 2007 through 2012. The exclusion must be connected with a decline in the home’s value or the taxpayer’s financial condition, and only applies to a principal residence, not investment properties.

          If you own a home you need to sell, this is absolutely not a time to experiment with selling prices and marketing.   It’s not a time to hire an inexperienced real estate agent.   You may only get one chance to do it right, and time is your enemy.   If you do everything right from the beginning, in four or five months, if your lucky you’ll have a closed sale.   Trip along the way on any of dozens of steps, and you will lose, and the consequences could be devestating.   The key to getting it right is finding an experienced professional who knows exactly what to do and when to do it.

          Last Updated on July 21, 2009 by Chuck Marunde

          Tags: credit scoresForeclosuresshort sales
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          Chuck Marunde

          Chuck Marunde

          Chuck grew up in remote Alaska, graduated from the University of Alaska with a degree in Economics and Teacher Certification, and after teaching high school for two years, went to law school at Gonzaga University in Spokane, Washington. He served four years as a Captain and JAG in the USAF at Nellis AFB in Las Vegas. After practicing real estate law for 20 years in Washington, Chuck founded iRealty Virtual Brokers covering Sequim and the beautiful Olympic Peninsula. He is the author of 2,200 real estate articles and a dozen real estate books, and he produced over 100 real estate videos. Chuck combined his love for real estate and technology to create a massive Internet presence, and his articles and videos and books have been viewed by millions. Chuck is a well recognized real estate expert and his counsel is sought by other brokers and practicing attorneys around the country. Buyers from New York to Hawaii and from Florida to Alaska seek him out to retain him as their buyer's agent, and home owners around the State of Washington seek him out because of his new Flat Fee Listing Service. 

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          Comments 8

          1. Va Foreclosure Sale says:
            14 years ago

            Hello, I found your blog via Google while searching for va foreclosure sale and your post regarding losures, Short Sales, and Credit Scores looks very interesting for me

            Reply
          2. Ken Obrien says:
            14 years ago

            What a great-easy to read article on such complex topic. Thanks Chuck!

            Reply
          3. Doug Orlando Real Estate says:
            14 years ago

            Yes, this website gives extensive information, just found it a couple of days ago and I have already returned here quite many times just to red the views on many topics.

            Reply
          4. Real Estate Mike says:
            14 years ago

            This is a great real estate blog…lots of useful information!

            Reply
          5. Learning Centre says:
            13 years ago

            This post is filled with useful information. I did not know that there were potential tax implications associated with a short sale. Thanks to you, I’m enlightened 😀

            Reply
          6. build mortgage says:
            13 years ago

            It is nice of the government to take money from you when you need it most when going through the proceedings of a short sale. But like the article says it’s better than a foreclosure and you can recover quicker financially and get on with life and maybe try again, but better managed.

            Reply
          7. Jeremy says:
            13 years ago

            I have to agree with the others. This is some outstanding advice. I am learning more and more. Thank you for sharing this.

            Reply
          8. Daniel McClain says:
            12 years ago

            Thanks for the information about Sequim and Port Angeles. Very good.

            Reply

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