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Can a Short Sale Help People With Bad Credit?
By Francine L. HuffMortgage Credit Problems Columnist
People with bad
credit may have a tough time qualifying for a debt consolidation loan or
mortgage refinance. As a result, more and more people who are overwhelmed by mortgage
debt are hoping their lender will approve a short sale of their home.
What's a Short Sale?
Homeowners facing foreclosure may be able to negotiate the
sale of their home for less than what they owe to their lender. Proceeds from
the sale go toward paying off the mortgage. However, even if a short sale is
approved, some lenders will require borrowers to pay off their remaining debt (called
a deficiency) over time. This depends largely on the state the property is
located in -- most states allow banks to collect deficiencies, but some like
California do not, and others allow it but make it difficult for the lender to
pursue. And in almost all cases a deficiency can be avoided in a bankruptcy
proceeding.
Qualifying for a Short
Sale
Not everyone will qualify for a short sale. Generally,
lenders will only consider short sales for people who are behind on payments
and demonstrate a real financial hardship. Homeowners hoping to make a deal
with their lender will need to be diligent about providing information. Writing
a letter to the lender that gives permission to discuss a potential short sale
with real estate agents, a title company, and attorney can help get the ball
rolling. People who write a hardship letter explaining how they ended up with bad
credit and unable to pay their mortgage could sway the lender in their favor. Lenders
will also want proof of income and assets, bank statements, and a comparative
market analysis.
Impact on Credit
Report
Short sales can affect credit reports differently, depending
on where and when they take place. If a short sale happens after foreclosure
proceedings have begun, the credit report will be affected much as though the
property was foreclosed on. However, if the short sale takes place and the
lender has not started foreclosure, the credit may not be adversely affected.
Finally, if the lender pursues a deficiency and takes the borrower to court,
there will be a judgment on the credit report which is seriously damaging,
especially as long as it goes unsatisfied (unpaid). Qualifying for a mortgage
or other large loan will be difficult for several years, so it may be tough to
obtain a debt consolidation loan.
A short sale can help a homeowner avoid foreclosure and free
up money to put toward a debt consolidation plan. If a person takes appropriate
steps to repair bad credit, such as paying bills on time and not making new
charges, they should be able to pay down remaining debts even without a consolidation
loan.
Sources
Mortgage
News Daily
Tucson
Citizen
Business
Week
About the Author
Francine L. Huff is a
freelance journalist and the author of The
25-Day Money Makeover for Women. She
has appeared on a variety of TV and radio shows.
About the Author
Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.
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