Personal Finance and Investing

Dear Credit Karma,
I am considering a short sale. My house in Ft. Lauderdale is $100,000 and underwater, and I project it’ll take me about 10 years to break even. I have an adjustable rate mortgage that recasts in September, and I have a very good credit score of 764. Though it really is against my values to do this, how much will a short sale hurt me?

A short sale will affect your credit negatively as well chew up significant time and effort to file and negotiate with your lender. There are other alternatives such as loan modification or refinancing your distressed home before you consider a short sale. The first thing you should do is check your mortgage paperwork and go through the fine print of your mortgage adjustment. If you received a prime loan and with historically low interest rates, there’s a good chance your mortgage will adjust in September with nominal changes to your payment. In fact, many mortgages are adjusting downward. Since you have good credit, you can also look to refinance to a fixed mortgage with lower payments .Or look out for the loan modification programs the federal government is initiating if you qualify.

Unfortunately, the better your credit, the bigger the damage to your credit score with every negative financial action. Though the impact on your credit score is determined by your credit history, a short sale is easier on your credit score than the alternative of a foreclosure, which can knock up to 200 points off your score, or twice as much as the penalty for a short sale, reports CNN Money.

Protect your credit rating as you go into a short sale by discussing with your lender how they will report it on your credit report. Pay specific attention to the wording. A short sale may simply be listed on your credit report as a satisfied debt, which is a more favorable term that won’t hurt your credit score as much as if your lender listed it as “Settled for less than the full balance,” which will cost you more points on your credit score. While these designations are still negative marks on your credit report, it is far less damaging to have on your report than a foreclosure.

Negotiating a short sale is also time-consuming and stressful for homeowners burdened with an underwater home. Convincing your lender to agree to a short sale is the first difficult hurdle; lenders only agree to a short sale to minimize their losses, so they will only settle with this option if the homeowner is under such extreme financial distress as to be unable to make mortgage payments. Short sales also require paperwork, the time it takes to find a buyer, and the additional resources it will take to close the deal with the new buyer before you are free of your underwater home.

One other potential cost: While a short sale typically includes the understanding with your lender that your outstanding debt is forgiven after the house is purchased, be sure that is the case and to get it in writing. Make sure to have documentation that the lender agrees that the short sale absolves all debts so you aren’t stuck with owing the difference in the value of your home and the remainder of your mortgage.

A short sale is the better alternative to foreclosure for severely underwater homes and homeowners who can no longer make mortgage payments, but it isn’t for those who can afford payments but prefer to get out of their mortgage. Check your mortgage paperwork, consult with a reputable mortgage professional as well as your lender to determine whether a short sale is the best strategy, or if other options exist that better fit your situation.

<

Similar Posts:

• For Underwater Homeowners, Will The New FHA Short Refinance Program Save You?
• Things to Have Removed from your Credit Report
• Consumers Have Trouble Deciding When Foreclosure is Best Option
• US Treasury Department Pushes Banks To Help Homeowners
• Alabama Mortgage Refinance