How bad is this gonna hurt?

I have gotten some people that are hesitant about doing a short-sale because they are worried that it will “screw them over for years to come”. I tell them that at this point the damage is already done (from late payments, et. al.), but that a short sale will be less damaging than a full foreclosure or bankruptcy. However, I don’t have any hard numbers to give for a more quantitative comparison. From the experiences you have all had, what is the typical damage once a short-sale is all said and done? Thanks.


Sounds like the typical misinformed distressed homeowner syndrome. You are right, foreclosure and bankruptcy have much more lasting consequences than a short sale. That being said, there are a couple of short sale related issues you should be aware of in order to advise your clients properly.

The lender’s loss from foreclosure or short sale of a person’s PRIMARY home is usually deducted by the lender/bank and reported as 1099 income to the homeowner. For 2007-2009, the IRS has changed the law and that income is no longer taxable as income for the homeowner.,,id=179414,00.html

FHA/Fannie/Freddie “Home Saver” Loans: This is a new type of loss mitigation tool that is being offered by the GSE’s. Basically, a homeowner’s back payments and penalties on a defaulted loan are “removed” from the property and placed in a separate UNSECURED type loan. Some of these loans are interest free, others are offered at very low interest rates. In a short sale situation, sometimes a negotiator will arrange for this type of loan to satisfy the 2nd. This is the type of loan that can “screw them for years to come.”

The unsecured nature of the Home Saver loan, puts it in the realm of revolving credit. At least in a foreclosure or short sale, the debt or obligation is wiped with the disposition of the property. Once a separate unsecured loan is taken by the homeowner, it is treated in much the same way as a credit card or utility company debt. Because it is no longer non-recouse (or tied to property), the collector can go after the borrower if they ever default - sometimes for up to 25 years (statute of limitations on revolving debt in some states).

That’s why it’s important to make sure all the i’s are dotted and t’s are crossed in a short sale negotiation. If a home saver type loan is the only way to get a short sale approval, then the homeowner has to weigh the consequences of taking on such a loan. Perhaps the amount to pay back is not so big that they would sacrifice their credit rating not to take it on.

Generally, a short sale is the BEST solution for a distressed homeowner - as long as you watch out for that infamous Home Saver loan.