Foreclosures and Short Sales, Equal Ills
Is there a right way to lose your home? And is there any good reason to pay for "expert" advice on how best to do it?
The result of a foreclosure or a short sale is basically the same -- a lost home and long-lived damage to your credit record. But the prevailing thought has been that a short sale, in which the lender approves a sale for less than the full amount owed, is worth the hassle because it damages your credit less than foreclosure. I've written as much in previous columns. But I've found that it's not necessarily so.
I've also found a burgeoning crop of for-profit counselors trying to sell pre-foreclosure advice to consumers.
What you don't need, when struggling with an unaffordable mortgage, is to spend scarce dollars on short-sale or foreclosure consultants. Reputable help is available, for free, from established nonprofit groups.
Probably the best solution, if your finances haven't disintegrated beyond rescue, is to work out a loan modification with your lender. As long as the result of a modification is affordable, it's the one option that allows you to stay in your home, and it's much less likely to ruin your credit. Depending on how your lender reports it to the credit bureaus, the loan modification might not even show up on your credit reports or FICO credit score.
A foreclosure and short sale inflict equal damage to your FICO score, according to Fair Isaac, the company that compiles those all-powerful numbers. Either will make you ineligible for three years for a mortgage insured by the Federal Housing Administration. (Extenuating circumstances, such as serious illness or death of a wage earner can justify exceptions, according to the FHA.)
There's not much difference between the two, according to Ira Rheingold, executive director of the National Association of Consumer Advocates, which is based in the District. "Whether you go to foreclosure or not, it does a lot of damage to your credit score," he said. You will always have to report that you lost a home on future mortgage applications. It will limit your chances of getting a new loan for as long as seven years.
Michael Radesky, a collections executive for Bank of America, which recently took over Countrywide Financial, said that when evaluating a borrower who had a short sale or foreclosure in his past, he would probably give a slight edge to the short sale. "With the short sale . . . at least the customer was at the table. In a foreclosure they were not," Radesky said.
The only real winner in a short sale is the buyer who gets the home at a discount, Radesky added. "It is an alternative that some Realtors will push on a customer," he said. "The Realtor still makes a profit on a short sale."
He added that borrowers are often surprised to learn that they may still carry some liability after a short sale. "We will try to negotiate an unsecured note for at least some of it," Radesky said. For example, he said if a short sale left $20,000 of the mortgage balance unpaid, the bank might agree to forgive $10,000 or $15,000 and ask the seller to sign an unsecured note for the remaining $5,000 or $10,000.
And although federal law has been temporarily changed so a seller won't owe tax on forgiven debt that was backed by his primary residence, that tax break is not available on investment properties or vacation homes. A short sale or foreclosure on such property would still trigger a tax bill.
It's tempting to think that a mortgage industry insider turned consumer advocate can offer some way out of these hard choices -- for a fee, of course. But they really can't offer any inside track or easy way out.