Effect of short sales in Las Vegas on credit score
In the last blog, foreclosure, Short Sale, Deed in Lieu? Which is worst for credit we talked about foreclosures in Las Vegas. In this Article we will discuss the effect of short selling a home on the credit score.
Short selling home or condos in Las Vegas
Short Sale-If you owe more than your home is worth but you want to try and do the right thing and assist the bank in minimizing their losses. A short sale in Las Vegas is the way to go.
Let’s say you bought your home in 2005 for $400,000. You purchased it with an 80/20 loan which meant you borrowed the whole $400,000. Now you want to sell the home and the market price for the home is $300,000.
You will need the help of an experienced Realtor who knows how to negotiate a Short Sale in Las Vegas. They will need to negotiate with both the first and second mortgage companies based on the comparable sales in the area and what amount of loss the two lenders are willing to take now. In order to avoid having to file foreclosure and take the house back.
Because the short sale option saves the lender thousands of dollars in foreclosure fee’s they would have to pay, not to mention in a declining market such as Las Vegas, where the home values may be falling thousands more each month, they are usually very motivated to work out a Short Sale arrangement.
Just because the mortgage companies agree to let you sell the house for a price below what you owe does not mean that they have forgiven the debt. They have always had the right in this situation to issue you a 1099 for the loss-$100,000 in our example. This Mortgage Forgiveness Act of 2007 was passed late last year and it is the opinion of many CPA’s that this Act will protect the property seller from owing taxes on the loss.
(This only applies to a primary residence, not investment homes). This remains to be seen however. If you are in this situation by all means make sure you are working with a reputable CPA who is very competent in the real estate tax laws. While many home owners may assume that since the bank agreed to let them sell their home for the lower price that they can consider the debt paid as agreed.
Short sales lower credit score
That will not be the case when it comes to the reporting on their credit. These mortgage accounts will likely show “Settle for less than amount owed”. That is not the same as paid. This will cause a big drop on the borrower’s credit scores and it is viewed the same as a foreclosure when it comes time to get qualified for a new mortgage. Mortgage lenders are looking for 3 years after the date a mortgage loan was “Settle for less than amount owed” before they will qualify the borrower for a new mortgage.
Short sales are better than foreclosures for credit score
It is likely however that the borrower’s credit scores will increase more rapidly after this event than that of a foreclosure. The exact difference is built into the proprietary scoring models that each of the three main credit repositories use to issue individual credit scores.
Bottom Line: This option certainly requires more work on the borrowers part to sell their property rather than walk away, however their credit report should repair itself more rapidly and if most of the CPA’s I have spoken to are correct, a home owner selling their primary residence should not likely have to worry about an additional tax burden in the form of a 1099.
In the next blog post ewe will discuss dee in lieu of foreclosure’s effect on credit score in Foreclosure, Short Sale or Deed in Lieu? Part-3 Deed in Lieu