The Aftermath: Short Sale or Loan Modification

short-sales road sign

Myth: A Short Sale will save your credit.

Myth: A Loan Modification will save your credit.

Fact: Because most lenders require borrowers to be late on their mortgage payments by about 3 months before attempting to obtain a loan modification or a short sale your FICO scores are going to seriously suffer. I was recently quoted on Bankrate and picked up by Fox News explaining what happens to the credit scores of those trying to modify a mortgage. It’s not good news for your credit scores.

There is a test underway to allow an improved scoring system for those participating in a loan modification or short sale. It is too early to tell if FICO will write new code for their mortgage scoring model. It is premature to presume banks will allow any leeway on their FICO scores for those participating in a loan modification or short sale. Now we have a sociological issue, too. Is it fair your neighbor didn’t pay as agreed and gets the same benefits as the ones that did not? I am not speaking to either side – just pointing out the obvious in there at least are two sides.

The proof of the damage that will be done to your credit is easy to earn. Refer to an article I wrote a couple of months ago and refer to the FICO Simulator. Plug in the scenario of 90 days late on the mortgage(s) for a modification. Plug in a scenario of a short sale which could easily take a half year or more, if then. You are making no mortgage payments during these time periods.

What’s the easy answer to mortgage problems?  There isn’t one. Either short sale, deed in lieu of foreclosure, loan modification, foreclosure or bankruptcy are all choices to help solve problem mortgages or problems with mortgage. Each choice has good and bad consequences. Explore your options and always keep in mind: 1) If it sounds too good to be true, it is. 2) What’s really in it for you?  3) There ain’t no such thing as a free lunch. 4) Work only with licensed professionals and check credentials (the professionals are proud to show their licenses –we’ve worked hard to earn them).

Yes. There are good reasons to do a short sale. For example, with a well executed short sale you will be paid about $3,000.00 as a moving incentive (this is known as Cash For Keys). Weigh this against how long you can live ‘rent free’, prior to relocation or foreclosure and eviction. Another example is extending the time you can live rent free while a short sale is being negotiated. You may wish to consider such a strategy following a failed loan modification attempt to gain additional time prior to relocation.


Image Credit: Google Images


 Financially SpeakingJames Spray CCMB, CNE, FICO Pro | CO LMO 100008715 / NMLS 257365 | July 26, 2010
 Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.


2 comments on “The Aftermath: Short Sale or Loan Modification

  1. […] – My real estate agent told me a short sale of my house and mortgage(s) will save my […]


  2. jamesspray says:

    Aside from the Cash For Keys benefit discussed in this article, there is one more benefit to a short sale for the short seller. This additional benefit runs hand in hand with the Cash For Keys/Relocation Fee. The short seller wishes to expedite (3-5 years from when the property transfers from the seller to a buyer) the return the property to the lender to start the clock of qualifying for a new mortgage or eliminating the responsibility of paying a Home Owner Association Fee. More on this in a future blog.


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