How Does a Short Sale or Foreclosure Affect me and my credit?

How does a short sale or foreclosure affect me and my credit?

That is the question that many people are asking. Times are statistically tough for many during this recession and people want to know what their options are and what they need to do. Im not a lawyer but this is what I am seeing in the loan world and in the credit arena.

My rule of thumb is always the following when it comes to making payments:

1. Always make your payments and fulfill your obligations.

2. If things are tough and there is no way out, call your lender BEFORE things are bad and before late payments are made. Always call your lender if you are going to be late. This is the same rule with landlords and tenants. The tenants that call the landlord and tell them things are going to be rough establish trust. The tenants that avoid the landlords calls develop no trust.

(Dont avoid your lender calling you. They can and may work with you during tough times. It may be embarrasing or something that one would rather hope goes away...but talk to your lender.)

3. Call a Realtor - One that specializes in short sales. Hopefully one that is very good before foreclosure comes. (We receive many referrals from Realtors that know how tough a short sale is and they send us their business because its a sale that only certain people can negotiate with the bank. We even help Realtors with their short sales.)

Here are the options and how it relates to you. Now Remember, if it is an investment property there may be tax consequences. Consult your accountant regarding this.

1. Foreclosure - In a nutshell, you could be sued, have a judgement against you for the difference, and unable to buy and own a home for 5 years.

When a foreclosure happens this hurts your credit very badly. Judgements for the deficiency can be placed on you for up to 20 years. Again consult your attorney regarding this. Im a Realtor, not an attorney. Credit is the worst it can get.

We have a friend that waited too long to sell their home as a short sale. He just received a letter in the mail sueing him for over $100,000 for the difference on the home.

2. Deed in Lieu of Foreclosure - Basically the same thing as above, however, you may be able to negotiate to not have a judgement against you. Still cant buy a home for 5 years.

3. Short Sale due to not making payments. - Earliest to buy a home..2 years.

In most cases the bank will forgive you of any money you owe them. You walk away from the property having "Settled" with the bank.

Not making payments causes the severity of the credit damage. When payments are being made, credit goes down the toilet really fast.

4. Short Sale while keeping your payments current. - Earliest to buy a home..2 years with LITTLE CREDIT DAMAGE!

The bank forgives you of your debt. You walk away from the home. You dont pay anything out of your pocket.

There are people reporting anywhere around a 50 point drop in fico scores immediately after this type of short sale. There are people reporting their scores dropping from 800 to 750 or from 715 to 680.

What options do you have with your current home and scenario? For a free evaluation find out online here.

View Fannie Mae Rules here with terms of buying a home after Short Sale and Foreclosure.