According To Wall Street Journal, Short Sales No Better For Credit Rating Than Foreclosure

Since the mortgage disaster started in 2007, I have never advocated that any owner participate in a “short sale” of their upside down property. I cannot find any legal advantage for a homeowner. The lender benefits by having the homeowner market the house and usually procuring much higher sale proceeds compared to the lender’s own fire sale. The biggest beneficiary is of course the real estate broker. (Earlier entries in this blog contained some heated attacks from realtors, who never like being exposed.) The buyer benefits by acquiring a house at a low price. But, where’s the benefit to the homeowner?? The lender usually does not release the homeowner from personal liability so the chances of a lawsuit seeking a deficiency judgment lingers after the short sale just as it does after foreclosure.

The most common reason people give me for their insistence in pursuing a short sale before letting a home go to foreclosure is “credit.” Most people tell me that a foreclosure has a worse effect on the borrower’s credit score, and they assume their credit will recover quicker if they provide the mortgage lender with a buyer in a short sale arrangement. Really?

A week ago, on Saturday, November 27, 2010, the Wall Street Journal, Nick Timiraoas wrote an article about short sales and credit. He posed the question, “Is a short sale as damaging to a borrower’s credit as foreclosure.” His answer was, “Generally speaking, yes.” He explained that in either a foreclosure or a short sale a borrower’s credit score will fall by about 100 points according to Fair Isaac Corp. So, your credit will get hit the same whether you make the effort to short sale your property or simply walk away.

A short sale may have a moral, non-legal, purpose. Many people feel a moral obligation to do every thing they can to pay back the bank. That obligation may include finding a buyer for the property to get the bank as much money toward the loan as is possible. Moral obligations are important in life, and some may find it more palatable to try to do as little financial damage as they can to their mortgage lender.  (To be perfectly candid, I would not consider myself one of them.  Listen to enough of our lender stories and, believe me, you will be convinced.)   It is important to distinguish moral issues from the legal and credit issues in the short sale procedure.  Putting it more bluntly, it is important to sift through the self serving BS and do what is in your own best interests.  Tell your realtor or attorney:  It's all about the deficiency.