Homeowners Who Are Upside Down on Loans Should Be Careful When Considering to List a Short Sale

Upside Down Homeowners Should Be Careful When Considering to List a Short Sale

With home loan foreclosure or deed-in-lieu of foreclosure, sellers will take a hit of 200 to 300 points on their FICO scores. The exact penalty on FICO will depend on overall condition of credit.

The effect of a short sale on a seller's credit FICO score is the same as a foreclosure. The penalty on a credit report will appear as a pre-foreclosure in redemption status and result in a loss of 200 to 300 points on FICO.

With a foreclosure or deed-in-lieu of foreclosure situation, a seller who wants to buy another home later will end up waiting about 36 months before a lender will offer a reasonable opportunity.

With a short sale, the notation on a seller's credit profile of 'settled for less than owed' (short sale) prevents the consumer from obtaining an institutional loan for about 24 months, depending on the lender program (Fannie Mae guidelines).

More bad news is that the short sale seller could be subject to lawsuit and deficiency court judgment for the difference between the loan amount and the amount paid.

In California, purchase money loans are not subject to lawsuit and deficiency judgments. However, hard money loans, equity loans and refinances are subject to lawsuit and deficiency judgments. Other states have laws regarding personal guarantees on loans, which could also result in lawsuit and deficiency judgment against the owner.

This is complicated. Homeowners considering to list for a short sale should be careful and consult a qualified real estate or tax attorney in their state and jurisdiction.

Posted by Harrison K. Long, Explore Properties Group, April 30, 2008