Credit & Short Sales
We once saw a blog post stating that the credit difference between a short sale and a foreclosure was like the difference between being hit by a train and by a bus. Either way, you're probably not going to live through it. We sort of smiled and chalked it up to another misinformed person, spreading opinions of what they "think" are facts.
But our smiling was in sorrow - after all, it's truly unfortunate that so many Americans avoid the short sale option based solely upon credit consequences. And blogs like that one are only serving to make the problem worse. The fact is, from our experiences, when most homeowners who are underwater on a mortgage do the math, they find that the financial benefits of a short sale dramatically outweigh the actual cost of credit loss.
The bus analogy may be true if, after being hit by that bus, it was possible to come back to life in 2.5 years. Real credit experts undeniably agree that 2.5 years after a short sale, it is possible to obtain a typical mortgage and other credit benefits if you do everything else right. So what most homeowners don't realize is that the credit consequences of a short sale are a lot more temporary than the financial benefits of erasing negative equity or permanently reducing your housing payments every month.
But, what if you're not facing foreclosure and regardless of what you do, you probably never will? Is the credit damage of doing a short sale worth the financial benefits?
The only thing that should determine your decision is the money you'll save or lose, based on the benefits and consequences of a short sale. Credit has a quantifiable value and so does the money you'll save in a short sale. When you compare the two, answering the question of whether or not a short sale is "worth it" is a lot more straightforward than most people realize.
All you really have to determine is:
- The financial BENEFIT, in dollars and cents, of doing a short sale
- The financial LOSS, in dollars and cents, of having reduced credit for for the next 2-3 years
Then, just do the math. If #1 is greater than #2, you will save money by doing a short sale. And since experts agree that short sale credit damage subsides after 2-3 years, then, 3 years from now, you could be in a much better position financially without any down-side whatsoever.
So, how do you figure the dollars and cents of #1 and #2 above? Well, as an example for #1... We can tell you that we know from experience that most of our clients save at least $200 per month in housing expenses and erase at least $10,000 in negative equity, after a successful short sale.
We also know that if they did not do a short sale, they'd have to own their homes for at least another 7 years before they would have the necessary equity to sell and break even.
When you look at the minimum numbers for most of our clients, a short sale represents a minimum savings of about $26,800.
How about you? What do you expect to save every month? How much is your home underwater? Simply take your monthly savings and multiply times 84 (7 years = 84 months). Then add that number to the amount of money that you're underwater. This is your short sale savings amount and now, you have calculated #1 for the above.
As for #2, this is a little more subjective and not nearly as easy to calculate, unless you don't plan to buy anything with your credit over the next 3 years. If you don't use your credit for 3 years after a short sale then the financial loss associated with a lower credit score is zero. You lose nothing.
If you do want to use your credit, we usually suggest that you speak with a credit counselor and try to determine a best estimate for the cost of slightly higher payments for whatever type of loan you wish to obtain... based on your estimated lower credit score. Then, just to be safe, double that number and consider it for #2, above.
Anything for #2 is always going to be a rough estimate; however, the point is that no matter how high you estimate this number, the amount you have saved in #1 is usually so HUGE that no matter how high you estimate #2, a short sale will still save you a ton of money.
If that's not true for you, don't do a short sale. There are better options out there when a short sale doesn't present a cost savings and when you're not facing foreclosure.
However, if you're like most of our clients and you calculated a huge cost savings - if #1 was a lot bigger than #2 - then it's probably about time that you stopped reading about our clients and become one of them yourself. Our service is free and our associates would be happy to help you understand the financial benefits of a short sale as they apply to your specific situation.