Short Sale Without Late Payments

I'm getting ready to do my first short sale where the borrower is NOT in default - all the payments are current. She asked me how the short sale will affect her credit - I said I thought her score might take 100 - 150 point hit. She then asked how much worse could her score get if she stopped making payments - her logic is that since her monthly payments are $2200 a month, she could save quite a bit if she stopped making payments. At this point we have no offer on the house, I just listed it (subject to 3rd party approval).

Anybody know how much worse the score would get if she stopped making payments...or any input on this?

First, most lenders will not consider a short sale unless default is imminent. Make sure that you are able to prove hardship and that the hardship is not temporary. IF it is, send this homeowner to someone who specializes in loan modifications.

Second, each credit agency has their own standard for how they value a missed payment, foreclosure or short sale. If the house goes to auction, this homeowner will have great difficulty getting a loan for the next seven to ten years. Likewise, she will most likely see a default judgment filed against her.

IF the house is sold through a short sale, her credit will recover more quickly . . . and there's a good chance that a deficiency judgment will not take place depending on how the negotiations go. [addsig]

Most banks that I've run across will at least be willing to entertain the idea of selling short if there are circumstances upcoming for the owner that would get in the way of making payments. Obviously the hardship letter needs to be very thorough.

Then again, I've had others that wouldn't even begin the short sale discussions until the note was at least 90 days late. I really all depends on the bank...

A lot of it depends on your state as well... Time lines play a large part.

IF you can show impending financial doom or an inability to pay then they may start the process (doubtful). In reality however there is no incentive if the loan is current for the bank to do anything.

Once they fall behind a few payments then the bank has a vested interest in working with the owner to limit loss.

Sometimes these types of deals are great for a sub to if they have good financing and can cash flow.. [addsig]

We were on the phone last night with a general manager of a loss mit department at one of the big lenders.

Concerning this topic he stated that their wasn't any motivation on their end to do anything until the homeowner was in default; however, he did say that they had given some approvals on deals of this nature. The issue, he pointed out, was that the approvals were at a number that left little room for an investor to quick-turn, if the was the exit strategy of choice. [addsig]

In addition to the posts above... in our neck of the woods, at least one lender will consider a short sale if they know they are "under water" with their loan. This was a neighborhood thing... everyone was clobbered. Comps were too high when everyone bought. One lender had basically lent to everyone... and short sales in this place were relatively easy.

To answer the question, though, see http://www.bankrate.com/brm/fico/calc.asp

This tool is pretty good at running different scenarios and seeing how they affect your credit. I would sit down with the property owner and show her this site. I would get some of her payment history information and start running through different scenarios. I did this one other time a few years back for an individual... although in hind sight, the best way to provide the answer to your "customer" is to have her put the information in the form herself. Both of you in front of the computer. She drives. This would show her that you empower her... and she will reach the same conclusion that you tell her... that late payments hurt credit... and NOW is time to act. This is what I will do the next time I have the opportunity.

that is a really neat tool - thanks

and thanks to everyone for their input - the lender has actually offered a DIL - terms yet to be determined....

I am in a similar situation but my bank has confirmed they will accomodate a short sale even though I am not behind on payments. I am debating whether I should stop making payments to my bank (I am still receiving rent) while I do the short sale process since my credit will tank anyway. Is this the wrong attitude? Is this legal considering I am still collecting rent (which still leaves $700/mo upside down).

Since my original post, I had a conversation with a LO who is starting to see short sales appear on credit reports - the latest one she saw resulted in a hit of about 50 points she said, the borrower had not been in default. A 50 point hit is not so bad. As to collecting rent and not making mortgage payments, I think you'll find language in your mortgage relative that you're supposed to turn over the rents but who in the world wouold do that? and even if you did, I can see where the mortgage company would reject the "payment" because it is not a full reinstatement.
I have to admit that I am considering short saling a couple of my own properties that are upside down. I just can't make the plunge and let my credit go down the toilet......yet.

here is what we do for folks who are not delinquent and want to protect their credit: Offer the bank a promissory note for all or part of the deficiency balance. I usually start the offer at 30% balance, 0% interest over 10 years. If the bank accepts (they always do), get in writing that they will release the lien without prdjudice, and follow up with credit agencies to make sure no hits occure. If they do, send the bank letter.

[ Edited by ICGPROPERTIES on Date 06/23/2008 ]

Good idea ICG! For me, the key would be the letter in writing so that your borrower has some recourse with the credit agencies. So, ICG, do the banks/servicers want this promissory note recorded in any way? Is there any kind of security instrument in place or documented in public record?

ICG, that's a great idea but does the short payoff show up as a discounted payoff on the credit report or just a paid-as-agreed payoff?

As far as I have seen, if the bank accepts a promissory, they will report paid tradeline. Get the letter though, just in case.