The biggest problem with walking away from your home and hastening foreclosure is that foreclosure is a huge blight on your credit score: a drop of perhaps 200 or more points on your FICO credit score. (A strong FICO score is around 700 and above.)
Still, if you have already missed a half-dozen or more mortgage payments as Bob and Sharon have, your credit score has probably already taken a big hit.
"Anybody that I talk to who even contemplates walking away from his home, I lay out a number of reasons they shouldn't," said Re/Max real estate agent Sal Poliandro. "A short sale is a way to get you out of your predicament with dignity. It helps the bank get rid of an asset before they come and collect it. When we talk about foreclosure, it's not just a financial thing. As far as credit goes, nothing will ever cost you the same. You're going to have to pay $600 a month for a car, rather than $300 a month. And, with a foreclosure, your name will be in the paper."
And foreclosure can be postponed, Poliandro said, while short sale negotiations are under way.
However, short sales may show up on credit reports as "pre-foreclosure in redemption status," which can seriously hurt the seller's credit score as well.
Craig Watts, public relations director for Fair Isaac Corporation, which created the FICO scoring system, said in an e-mail: "The effect on a FICO score is likely to be very similar for both actions [foreclosure and short sale]. The impact depends on how the lender chooses to report the foreclosure or the short sale to the credit bureaus."
A foreclosure remains on a mortgage-holder's credit report for seven years. But the FICO Web site says, "While a foreclosure is considered a very negative event by your FICO score, it's a common misconception that it will ruin your score for a very long time. In fact, if you keep all of your other credit obligations in good standing, your FICO score can begin to rebound in as little as two years."
Funny that the Re/Max real estate agent is giving foreclosure and financial advice??? And that the FICO guy basically contradicts everything the Re/Max agent says. First thing to note - do not take any financial from a real estate agent, ever. To become a realtor in New Jersey you just need 75 class hours and passing an exam. No college required either - and yet dispensing some of the most important financial advice one may face in their lives. This ought to be illegal!
From the State of New Jersey website -
What are the qualifications for a Real Estate Salespersons license?
To qualify for a Real Estate Salespersons license you must be at least 18 years old, have a high school education or equivalency, complete a 75 hour pre-licensure course at a licensed school and pass the New Jersey examination. After passing the examination, you must apply for a license through a sponsoring Employing Broker within 1 year from the expiration of the school certificate or you must again complete all requirements.
So what have we learned from today -
- Don't take financial advice from a realtor! You may as well be taking financial advice from the guy next to you at a bar or the woman next to you at the salon. Or maybe the cashier in the grocery store - they are in sales too! And they deal with money all day!!!
- Your credit score may be harmed the same either through foreclosure or short sale.
- If you choose foreclosure rather than a short sale your name will appear in the paper (in an obscure section that no one will read other than people looking to get a good deal) and this could be devastating!
- Talk to a lawyer or a financial planner to help with your decision and issues - not a realtor!
- We need a state-wide push to make realtor's giving financial advice to their clients illegal!