Underwater Mortgage Short Sale Programs From Federal Assistance Plans–Can Homeowners Avoid Credit Score Damage?

Home prices have continued to drop in certain areas of the nation, but there are mixed reports as some areas have been seeing more positive results in the housing market, with some reports that sales are even increasing in certain states, but there are homeowners who are finding that a short sale is necessary here in May in order to avoid a formal foreclosure from their bank, but what many homeowners have failed to realize is the adverse effects that a short sale may still have on their credit score. Reports that were released a few weeks ago from FICO have shown that short sales and foreclosures have done similar damage to a homeowner’s credit score, which has many questioning why homeowners are attempting to short sell their home in the hopes of avoiding a hit to their credit.

Homeowners do need to understand that foreclosures can be seen in a more negative light than a short sale by future lenders, and it will not always be a case that a short sale will do similar damage to a particular homeowner’s score had they gone through foreclosure, but there are still men and women who are finding that the damage to their credit from a short sale has been so substantial that facing foreclosure would have brought about similar results. Yet, there are some financial institutions who are still proposing that mortgage principal reductions are offered to homeowners in cases where foreclosure or a foreclosure alternative plan could be avoided, which may be beneficial to homeowners in the coming months if more institutions will implement underwater assistance programs further.

Yet, there are some financial advisers who feel that even though a short sale may be viewed in a more positive light, due to the fact that a homeowner may have suddenly come upon a financial situation where they could not meet their home loan payment, as a result of unemployment for example, and rather than walk away or resigned themselves to foreclosure they attempted to sell their home at a loss. The problem that many are seeing comes in the form of the amount of money that is still owed to their bank showing up on their credit report, and this obviously could do a great deal of damage if a consumer does not keep close watch.

Simply put, if a homeowner sells their home at a loss, the difference in the original amount owed and the sale price could be shown as a balance owed on a homeowner’s credit report despite the fact that a short sale agreement states that a homeowner no longer owes money to their financial institution. In instances such as this, homeowners can speak with their bank and request that this balance not be reported, but in these cases it must be done before a short sale closes, as a bank may be less willing to work with a homeowner after the deal is done.  Requesting the balance not be reported is not going to guarantee that it isn’t, but homeowners need to understand a short sale will cause a drop in their score even in a best-case scenario.

However, preventing a short sale or foreclosure altogether is the obvious optimal choice that homeowners are seeking, and before financial difficulties become too problematic, it’s hoped that more homeowners will either speak with their servicer or a housing counselor in the hopes of exploring federal modification programs or other foreclosure prevention plans that could be helpful even when negative equity is in place.