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Short Sale or Deed in Lieu and the Impact to your Credit

Posted by Jesus (Jesse) Gonzalez on October 28, 2013 at 8:18am

Many people have no clue what happens or if anything happens to their credit when they complete a short sale. Truth is, many people just don’t know however, some really great articles are out there about this very topic and yet, so many questions still exist.

The first article I want to draw your attention to is notably an older article however, based on all the chatter I hear on a daily basis about how a deed in lieu or short sale will impact your credit, I really think this article should be revisited.

As published in the Washington Post 8/30/2011 by Michelle Singletary she stresses the fact the actual credit score it’s self, also known as the FICO score may be impacted differently by a short sale or deed in lieu however, that impact is so marginally different that, claims a short sale is less negatively impactful than a deed in lieu seem a bit farfetched, when strictly referring to impact of the FICO score. If you want to read her article yourself, click here.

A 2^nd article I think you should read is by Linda Ferrari on 6/9/2009 on her blog, Linda Ferrari Your Credit Score Expert. She wrote an article titled The Mortgage Crisis and Your Credit Part Three: Deed in Lieu of Foreclosure. This article is really good from the stand point about how your credit score is impacted by how the deed in lieu is reported. Many people don’t realize that the bank can report your deed in lieu three different ways and of those three different ways, the negative impact will vary from most negative impact to lest negative impact. I would strongly suggest you read her article to learn more about how it’s reported. It was a huge eye opener for me.

Finally, I found a great article, maybe the best one on what the future may hold for those of you who have completed a short sale vs a deed in lieu. Now this article is very recent, in comparison to the other two, it was written back on 7/8/2013 by Alanna McCargo and even better, it’s posted on the Equifax forums giving it credibility. It’s titled “Can I buy a Home After a Short Sale or Foreclosure” and, the best part is her approach to credit fundamentals and how important it is to do all you can to protect your credit.

All in all, after these I read these articles and did some further investigation on my own, here is what I learned.

Your credit will be negatively impacted by a Short Sale, Foreclosure or Deed in Lieu.
The negative impact to your FICO score will be marginal at best between the Short Sale, Foreclosure or Deed in Lieu.
When you agree to participate in any of these default disposition options, CONSUMERS MUST READ THE TERMS AND CONDITIONS OF THEIR PARTICIPATION and watch out for how their action is being reported to the credit reporting bureaus. The truth is, some reporting options are much more negatively impactful than others. Consumers need to know they have options they can negotiate here for a less negative impact to their credit.
Finally, benefits like, relocation assistance, no risk of future deficiency judgments are not guaranteed and once again, CONSUMERS MUST READ THE TERMS AND CONDITIONS OF THEIR PARTICIPATION as these additional benefits are NOT guaranteed. Consumers have options here to negotiate a better deal and should be aware they have options.

If you are considering a short sale, contact me, Jesus “Jesse” D. Gonzalez Jr. Realtor / Principal Broker of Liberty House Realty LLC. I would be happy to discuss your options with you and how we can help. 615-424-0961

Deeds in Lieu of Foreclosures: Homeowners Need to Be Informed

Posted by Marcy Moyer on July 2, 2010 at 6:50am

An Interesting Alternative to Foreclosure: A Deed in Lieu of Foreclosure (edit/delete)

There is a new (actually renewed ) option for underwater homeowners who cannot, or do not want to pay their mortgage. A deed in lieu of foreclosure is an agreement between the bank and the borrower. The borrower gives the home back to the bank and the bank does not have to go through the foreclosure process. It can be a win win situation for both the bank and the borrower.

The government HAFA program is the major force behind this renewed option. If a borrower does not qualify for a loan mod, or gets a mod and is not able to make the payments, this government program encourages the banks and the borrowers to pursue either a short sale or a deed in lieu. By encouragement I mean gives financial incentives, in order to decrease the number of foreclosures, vacant homes, and neighborhood blight.

Under the HAFA deed in lieu program the borrower agrees to give the home back to the bank and in exchange the bank helps with some relocation costs and also agrees not to pursue a deficiency judgment. Depending on the state the borrower lives in and they type of loan, after a bank forecloses or agrees to a short sale they still may have the right to go after the borrower for the amount of the money the bank lost. HAFA stops that ability of the bank to pursue a deficiency.

In addition to the halting of any deficiency judgments, the privacy afforded by not being foreclosed and evicted, and the help with re-location costs (Bank of America is offering $3,000-$15,000) borrowers who agree to a deed in lieu can purchase another home after 2 years instead of the 5-7 after a foreclosure.

So what is the catch? The pesky second loan once again can get in the way. If the borrower has a HELOC or second loan on the property this process does not work. In these cases the borrower must try for a loan mod, do a short sale, or be foreclosed if he/she can not pay the mortgage.

In California as well as other high priced states many homeowners have at least two loans on their homes. The cost of the home required so much down payment that many borrowers used a second loan in place of, or in addition to the amount they had for their down payments. As a result the option of a deed in lieu of foreclosure is not an option.

I think this is a good option for banks and homeowners. Wouldn't you enjoy not having to kick someone out of their home?

Obama Supplemental Directive for Short Sale and Deed in Lieu

Posted by Jesus (Jesse) Gonzalez on December 2, 2009 at 5:22am

Quote: “This Supplemental Directive provides guidance to servicers for adoption and implementation of the Home Affordable Foreclosure Alternatives Program (HAFA). HAFA is part of HAMP and provides financial incentives to servicers and borrowers who utilize a short sale or a deed-in-lieu to avoid a foreclosure on an eligible loan under HAMP.” November 30, 2009 the Obama White House released their “Introduction of Home Affordable Foreclosure Alternatives – Short Sale and Deed-in-Lieu of Foreclosure. Unlike much of Congress, I have read this document and want to highlight some features for you that you will want to be aware of. First, you can read the document for yourself by following this link, https://www.hmpadmin.com/portal/docs/hamp_servicer/sd0909.pdf which was provided by Tere Rice, a member of REOPro. These guidelines are a part of HAMP, the governments Home Affordable Modification Program and for servicers who participate in HAMP this directive does “require participating servicers to consider borrowers for other foreclosure prevention options, including Short Sale…” In essence, we now have a White House Directive to banks and servicers to use Short Sales as a tool to prevent foreclosure. You would think this was a no brainer however, now with this directive comes objectives and benchmarks. One of these benchmarks / objectives / procedures is, “The servicer accepts the short payoff in full satisfaction of the total amount due on the first mortgage” In other words, no deficiency judgments on first mortgages. The directive goes further and says, “With either the HAFA short sale or DIL (Deed-in-Lieu), the servicer may not require a cash contribution or promissory note from the borrower and must forfeit the ability to pursue a deficiency judgment against the borrower.” A second process change is the streamlining of the process. The directive allows utilization of all the borrowers information collected originally for HAMP consideration in conjunction with the Short Sale. It allows the borrower to receive PRE-APPROVED short sale terms prior to listing the property. It prohibits the servicer from requiring, as a condition of approving the short sale, a reduction in the real estate commission agreed upon in the listing agreement. Requires the borrower be fully released from any future liability for the debt. Provides incentives to borrowers, servicers and investors to cooperate as well as uses standard forms and documents. Now, we do have some requirements here and they are….. 1. Must be principal residence 2. The mortgage loan is a first lien mortgage orginiated on or before 1/1/09. 3. The mortgage is delinquent or default is reasonably foresseable. 4. Current unpaid principal balance is equal to or less than $729,750.00 and the borrowers total monthly payment exceeds 31 % of the borrowers gross income. 5. Lastly, the borrower must have been declined for HAMP or HAFA before Short Sale or DIL will be considered. Some other interesting things I read was the requirement that servicers notify borrowers that a Short Sale is an option. The servicer will have to independently assess the value of the property at the servicers expense. The home must have clear and marketable title. All decisions must be communicated to the homeowner in writing. It must explain why a short sale can’t be offered and give the homeowner the option to call the bank and discuss why. The servicer is required to provide the Minimum Net Proceeds hence, the Pre-Approval. The directive does have a lot of time lines requirements….really too many to log here in this blog so, it’s impearative you read this document before you do your next short sale. Some requirements extend all the way to the agent yourself so, you better be aware of how this is going down otherwise, you may find yourself on the wrong side of the directive. The best part is, “APPROVAL OR DISAPPROVAL OF SALE. Within 10 business days of receipt of the RASS and all required attachments, ther servicer must indicate it’s approval or disapproval of the proposed sale by signing the appropriate section of the RASS and mailing it to the borrower.” If you are wondering what a RASS is, then you better read the directive.

lieu (3)

Short Sale or Deed in Lieu and the Impact to your Credit

Deeds in Lieu of Foreclosures: Homeowners Need to Be Informed

An Interesting Alternative to Foreclosure: A Deed in Lieu of Foreclosure (edit/delete)

Obama Supplemental Directive for Short Sale and Deed in Lieu

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