A well-traveled internet myth is that short sales are “better” on your credit than foreclosures. It’s not really true that short sales are softer on your credit than foreclosures. A short sale can be nearly as bad as a foreclosure on ones credit, depending on the circumstances.
After a short sale closing I had last month, my client suffered what I consider to be minimal credit damage. We closed on the short sale of the client’s condo in Arlington Heights and he was three months behind on his mortgage payments. His credit was 780 before the short sale.
Last week, after the short sale, he checked his credit again and it was 680. So, it dropped 100 points, which isn’t too bad.
There was no foreclosure filed in this case and the short sale included a release of deficiency, so it was really close to the best of all circumstances (except that he was three month behind on the mortgage). His credit score was eerily close to the credit score predicted in this post for “Consumer C” which leads me to believe that the information in the chart shown there is pretty close to reality.
The client will be prohibited from getting a mortgage for at least two years, but with a 680 credit score he can get an FHA 3.5% down mortgage easily after the two years pass.
This morning, I read with interest a story in the Wall St. Journal called “House is Gone But the Debt Lives On.” When I finished reading the story, my first thought was…this is going to freak out a lot of people unnecessarily.
(Aside: I read this on my Ipad and I highly recommend the WSJ tablet edition. It’s beautifully designed and very easy to read. It has a monthly fee, but it’s cheaper than the print edition).
The story covers how there has been an increase in deficiency judgments entered this year in a Florida community. A deficiency judgment is a court judgment entered against the owner after a foreclosure for the difference between the mortgage balance and the market value of the property.
The community is Lehigh Acres, an overbuilt central Florida boom town. It’s so bad down there that they could rename it “Deficiency Judgment Acres.” In the first 7 months of 2011, there have been 42 deficiency judgments entered against foreclosed owners in this subdivision alone for more than $7 million. Most of these judgments will be uncollectible, I would guess.
Here are the main points of the story:
1. Deficiency judgments are increasing in Florida.
2. Deficiency judgments elsewhere are still rare, unless the foreclosing bank is small bank or a credit union.
3. Down the line, debt collectors may buy foreclosed mortgages for two cents on the dollar and then may try to collect against foreclosed owners.
How does this apply to Illinois? Deficiency judgments are still rare in Cook County, so there is really no comparison to what is happening in Lehigh Acres.
It is always possible that foreclosed first mortgage debt could be dumped to debt collectors. I haven’t seen that happen yet, but you never know.