Why short sales make sense even if you have to file a bankruptcy
You or your bankruptcy attorney might assume that a bankruptcy is as bad if not worse than a foreclosure so if your credit can’t get worse, what’s the point in doing a short sale?
One reason may be that some attorneys try to avoid as much work as possible, and since they would have to file a couple of extra documents to help their client do a short sale, well its just easier to discourage it.
The second reason attorneys think this way is because attorneys don’t care about your future credit. Well, let me rephrase that…they don’t have any incentive to care; I don’t mean to imply they are heartless, and some attorneys might actually care about your credit. But if someone has just helped you destroy your credit by filing a bankruptcy, in their mind doing a short sale after or during a bankruptcy is a bit like tagging a band-aid on the titanic. Too little too late as they say.
They also are typically only looking at it from a legal perspective, meaning because of the bankruptcy you are no longer responsible for the debt, so they are correct that it’s a bit pointless to do a short sale if all you are worried about is owing any deficiency.
This however is a short sighted mindset, as it only takes into account the present at the expense of your future. They are essentially saying that it doesn’t matter because the mortgage company can’t try to collect the debt. But the most relevant question you should ask yourself is, do you want to buy a home some time in the future? If so, this decision is more important to consider than most bankruptcy Attorneys, and their clients might think.
When facing financial hardship, you can save yourself valuable time and avoid stress if you begin looking immediately at how to rebuild your credit and financial health. Don’t wait for the aftermath, or worse, waiting years later to begin planning your path back to good credit and home ownership.
Doing a short sale, even if you are in a bankruptcy is a huge step in the right direction if you plan to rebuild your credit and own a home again some day. At the very least it will keep your wait under current mortgage guidelines to 24 months as opposed to 5-7 years.
Sometimes people are filing a bankruptcy to move on with their life. They want the mess behind them. They want the proverbial ‘clean slate’.
BUT if you factor in the long term goals of most people, like owning a home, it makes sense to do everything you can to ensure you have a clean credit file. Short sales look better on your credit in the long run, but sometimes people just can’t deal with more stress, that’s just how it is, and they feel they will simply deal with the resulting consequences later when they are in a better state of mind.
A short sale is BAD of course, but it IS NOT as bad as a foreclosure nor is it as bad for as long as a foreclosure.
By law, foreclosure stays on your credit for 7 years. Bankruptcy also remains 7 to 10 years depending on what chapter you file under. The major CRA’s or Credit Reporting Agencies such as Trans-union, Experian and Equifax do not release to the public how they calculate credit scores, however there are ways out there to simulate how events like bankruptcy and foreclosure factor in to your score, and typically a settled account such as a short sale or a credit card settlement, will affect your credit score negatively for 12 months. After that first year these simulators suggest that the negative impact begins to greatly diminish.
What we do know for sure is that the time to get a mortgage after a short sale is less than it is after a foreclosure. So often the argument about how it affects your credit score is a pointless issue because the majority of people are more concerned with the question of when they can own a home again. Because of this the waiting periods to get a mortgage after a short sale that are imposed by the mortgage industry are really the most important relevant issues to any homeowner.
Where do we go from here ?
Now that we understand the perspective that attorneys have, and why they often recommend not doing a short sale, let’s look at how we can determine for ourselves if a short sale is the right choice.
The way to determine if you should do a short sale while in bankruptcy is to ask yourself this one simple question; Even though my credit is going to be damaged now, do I want to own a home again sometime in the future?
If the answer is yes, then you should seriously consider the idea of doing a short sale regardless of a bankruptcy filing.There are several good reasons that you should consider a short sale over letting it go to foreclosure. For instance most lenders require 24 months from a foreclosure before you can get a mortgage.
*UPDATE*
[As of 2008, Fannie Mae and Freddie Mac are now indicating that they will have new guidelines for those who have had a foreclosure or a short sale. The statement says:
Fannie Mae
• will now prohibit foreclosed borrowers from getting another mortgage through the giant investor for five years.
• If there are “documented extenuating circumstances.” the mortgage prohibition is for three years.
• After five years, borrowers with foreclosures in their files will have to put at least 10 percent down and need minimum FICO credit scores of 680.
Freddie Mac• will now prohibit foreclosed borrowers from getting another mortgage for seven years.
• The company also claims they will “aggressively pursue walkaways to preserve our deficiency rights” where permitted by state law.
While they have not indicated yet what the rules will be for a short sale, in the past they have been as much as half the waiting period for a foreclosure. Previous guidelines called for a 1 year waiting period before a mortgage could be obtained after a short sale.
It is important to remember that there are two aspects of your credit to consider when determining whether or not to go through with a short sale. These two aspects are the FICO score impact and underwriting guidelines and how they will affect your ability to get a mortgage.
Two for the price of one
Despite the fact that the FDCPA or Fair Debt Collections Practices Act requires that all debts included in a bankruptcy be reported on your credit report as “included in bankruptcy”, there is a second place that a foreclosure shows up on your credit report; Public Records.
So you have the mortgage company reporting on their line that the loan was foreclosed, and then you have the foreclosure itself showing up in the public records. This will remain on a credit report for 10 years.
Knowing what has happened in the mortgage and banking world starting in 2007 through the present, its likely that lending criteria will continue to become more strict as banks look to avoid repeating the mistakes of the past 6-7 years. Because of the tightening of credit and increasingly strict lending standards it’s more important than ever that people consider the implications of their choices as they go through financial difficulties such as bankruptcy and foreclosure.
