Short Sale SellersShort Sales and FICO score
There appears to be a gray area with many homeowners on the difference on how FICO score is changed when dealing with a foreclosure or short sale decision. Here are some points and clarity to those ‘gray’ areas.
1) There is a benefit to choosing a short sale versus foreclosure, if the homeowner is unable to structure a workout or forbearance agreement with the foreclosing lender. Fannie Mae has established a 2 year elapsed time period for reestablishing credit for homeowners who decide to sell their homes through a short sale. Comparing this to foreclosures, effective May 31st by Fannie Mae, a homeowner who files a foreclosure is ineligible for a loan for 5 years, that’s including a house or a new car.
2) Avoidance of a deficiency judgment. A deficiency judgment is obtained when a property is foreclosed and sold (by the clerk of the court) to the highest bidder at auction. The deficiency judgment can be obtained by getting the difference between the high bid and the higher foreclosure judgment amount. The court will determine which value is higher, the high bid or the appraised value of the property on the date of the public sale. The higher of the two is taken to determine the difference from the judgment amount and this difference is the deficiency judgment. These judgments can only be removed by paying off or by declaring bankruptcy. Deficiency judgments earn interest until paid….and Florida right now has a rate of 11% a year. If a homeowner is saddled with a deficiency judgment, then they won’t be able to buy anything using credit. Back in the day, the banks seldom enforced deficiency judgments and would sell the judgment for 5 to 10 cents on the dollar. For $100,000 deficiency judgment, they would invest $500 in attorney fees and get $10,000 in return for pushing paper. Another point to consider, is if the home goes into foreclosure and is taken by the bank to be listed as an REO, the meter keeps running on the costs incurred by the bank until the REO department sells the house which can make the deficiency much larger.
In the long run, one can see how FICO score can pale in comparison to the long term harm a deficiency judgment or an inability to get an approved loan for years to come.