It is probably safe to assume that most consumers like to work with folks they know can be trusted. In Real Estate, like some other businesses there are those that can always be counted on for delivering great advice and others that only care about their own pocket book.
I always tell people some of the best Real Estate agents are those that don’t NEED to make a sale! It makes perfect sense because an agent that NEEDS business is far more likely to tell a buyer or seller something they want to hear rather than the truth.
Short sales unfortunately are a specialized Real Estate transaction where information is often times bandied about with no basis of fact. Many Realtors blindly go around telling people in financial distress that a short sale is better for their financial future because their credit score will not be impacted like going through a foreclosure.
Folks this could not be further from the truth! While there are certainly advantages of pursuing a short sale vs foreclosure, credit scoring is NOT one of them. There will be plenty of Realtors that will read this and argue with me telling me I am wrong.
As a Realtor who is tech savvy and social media connected you will see many of my articles in places such as Linkedin, Twitter and other Real Estate forums.
They will see some of my short sale articles and flat out tell me that I have incorrect information. When I mention the credit scoring impact of a short sale compared to a foreclosure is just about the same they scowl in disbelief. They will tell me I don’t know what I am talking about because they just learned differently at some short sale course their local Real Estate board was putting on. At this point I will be laughing because the people that teach these courses are usually Realtors that couldn’t make it in the business. They teach this nonsense because it is propaganda that helps get Realtors more business.
By now you are probably thinking how do I know the credit scoring impact is similar in these two financially stressful events. You have every right to be wondering! I know because I go right to the source. My FICO is the governing body for credit scoring including what happens in both a short sale and foreclosure.
Short sale vs foreclosure credit scoring impacts
Since I am often getting challenged on the credit scoring impacts by other Realtors and get asked all the time by my clients, I am going to share a very interesting study that was conducted by Fair Issac corporation.
The FICO study took various types of mortgage delinquencies on three credit bureau profiles of consumers that had scores of 680, 720 and 780, respectively. The study focused on consumers whose credit characteristics (e.g., utilization, delinquency history, age of file) were typical of the three score points considered. All of the consumers had an active currently-paid-as-agreed mortgage on file.
Results of this credit scoring study are shown below. The first chart shows the impact on the credit score for each stage of delinquency and the second shows how long it takes the score to fully “recover” after the fact including a short sale or foreclosure.
What you can easily see by this study is that there is a negligible difference in credit scoring when comparing a foreclosure or short sale. While it seems unfair, those that had a higher credit score to start will see a greater scoring drop. In addition, the higher starting score, the longer it takes for the score to fully recover.
While there is a minimal difference in scoring impact between moderate and severe delinquencies, there may be a significant difference in time required for the score to recover completely.
These statistics are right from the guys that make credit scoring. They are not opinions. This is actual data that was put together and sourced by FICO themselves.
Benefits of a short sale vs foreclosure
So what are the benefits of going through a short sale rather than letting a lender foreclose on your property? The biggest advantage is that you will be able to buy another home in the future a lot quicker than you would with a foreclosure. Generally speaking the turnaround time for getting another loan after completing a short sale is two to three years. In a foreclosure it is typically five to seven years. There are a number of circumstances that can affect the time frame including whether the loan is FHA, Fannie Mae or Freddie Mac. For a complete financing guide see buying a home after short sale or foreclosure.
One of the other big factors you need to consider is your employment status. There are a number of large companies that will not hire a new employee that has a foreclosure on their resume. While this may not seem fair with all the financial turmoil that has taken place over the last five years, employers look at a foreclosure as a black mark on your record. In other words when you short sale a property you are owing up to a financial commitment. In a foreclosure you are walking away and taking no responsibility for your debt.
The last reason why more and more will choose a short sale over a foreclosure is just the sheer embarrassment of going through a foreclosure proceeding. In some states an auction is held right on the front lawn of the property. Who wants to lose their home and then have salt rubbed in the wound by watching a bunch of buyers compete over it. This is an unsettling experience for most.
The goal of almost anyone that goes through a short sale or foreclosure will be to improve their financial stability moving forward. Of course improving the impact a short sale or foreclosure had on their credit scores will typically be one of the first areas that people look at once they are back on their feet. There are certain things you can do to help fix your finances after a short sale or foreclosure that are covered in this helpful article.
Unfortunately, sometimes people just don’t realize they have options and just lose their home to foreclosure. Many have never taken the time to do any research and just assume there are no alternatives. A short sale can be a great alternative for some home owners – best of luck if you are one of them!
Short sales are difficult transactions that are critical to have the right Realtor representing you. Do not make the mistake of picking a Real Estate agent that does not have experience closing short sale transactions.
MacIntyre & Cowen, Short Sale Specialists, RE/MAX Real Estate Professionals Grand River, can help you navigate this process and get your home sold. With the extension of the Mortgage Debt Relief Act until the end of 2013, now is the time to act if you are underwater in your home. We would gladly provide a complimentary Over-the-Net Home Evaluation or email alerts to Hot Buys / Foreclosed / Liquidation & Luxury Distressed Properties in the Mid Michigan areas including Greater Lansing, Haslett, Okemos, East Lansing, Grand Ledge, Holt, Williamston, Mason, Eaton Rapids, Dimondale, Dewitt areas and more. Feel free to contact us at 517.999.2675 or visit us at www.pmachomes.com today!
Article courtesy of Bill Gassett. The above Real Estate information on Credit scoring impacts of short sale vs foreclosure was provided by Bill Gassett, a Nationally recognized leader in his field.