A Short Sale, Anything But Short

The first time I heard a buyer say they thought a short sale was someone who needed to sell quickly (in other words, they thought the sale would happen in a short period of time), I giggled a little. When I thought about it, I could totally understand the thought pattern. The reality is nearly the opposite....a short sale can be anything but short!

The term actually refers to the current owners needing to sell and being "short" the funds it will take to pay off the lender. So, the current owners need to negotiate with their lender an alternate repayment plan or forgiveness of the remaining debt. In today's market, banks are doing anything to avoid foreclosures, so we are seeing more and more short sales approved; very often with full debt forgiveness to the sellers.

This is truly a win for the sellers. Sure, their credit takes a hit. But, their bank accounts and immediate financial future is far better off than if they were to go through a foreclosure. And, it is expected that many of these sellers will be eligible for purchasing again in the not so distant future.

Buyers, on the other hand, need to be willing to stay the course, and hope for the best. There are opportunities and risks.  Be sure you understand them.

Because in many segments of the marketplace today, most of the available inventory is short sales, I am going to try to break down this very complex process so you're better equipped to consider buying or selling in this kind of a transaction.

Stay tuned to http://www.therealestatewhisperer.blogspot.com/ in the coming days.

UPDATE: Read "The Long and Short of a Short Sale: Part 1 , Part 2 ,  Part 3 , Part 4 and Part 5" by clicking on the light pink links.

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Post written by Vicky Chrisner; Keller Williams Realty

http://www.vickychrisner.com/

Questions and comments can be posted here, or for more privacy, please feel free to email me: VChrisner@KW.com

Demystifying Credit Scores - Updated 11/29

Recently, I had the opportunity to participate in a conference call with Dave Wheeler from Credit Plus. Credit Plus is a credit scoring company that supplies information to mortgage lenders. In other words, Dave is "the man" (or one of them) that creates, interprets and manipulates the credit scoring model.

During our conference call, he demystified many things for me, that I would like to pass along to you... it was a lot of information, so I have broken up these topics into a series of mini-posts for your easy reference.

Part 1:  All Credit Scores Are Not Created Equal - now available

Part 2:  How Inquiries Affect Your Credit Score - now available

Part 3:  How Foreclosures and Short Sales Affect Your Credit Score - UPDATED 11/29

Part 4:  So What? - UPDATED 11/29

Part 5:  Rebuilding Your Credit - now available

These posts answer 90% of all the questions I get about credit scores.  Hopefully, they will help you understand how your creditors are viewing your credit.  Please keep in mind in the last 18 months, the credit scoring model has changed THREE TIMES.  So, this is an ever evolving industry.  However, the basic principles have remained constant for some time now. 

November 29, 2009:  The chart shown is copied from an article on Creditcards.com by Jeremy Simon, based on NEW information just revealed from FICO.  FICO will be releasing even more information which will be available on their web site this weekend. 

If you're thinking of buying, I encourage you to start looking into your credit, but also to contact a mortgage lender who can further assist you.  Credit reports are not the only thing that lenders consider, so beware.  Do not spend every dollar you have to pay down existing debt... sometimes you'd be better off having some cash on hand.  Let them help you look at the big picture.  I actually suggest you start thinking about financing as much as 6 months to a year before you plan to buy.  For a referral to a trusted lender, contact me today!

Demystifying Credit Scores: Pt 5 Rebuilding Your Credit

This is the last of our series on Demystifying Credit Scores.

Please be sure and read through the other posts, too. 

Start here:  http://therealestatewhisperer.blogspot.com/2009/10/demystifying-credit-scores.html

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So, your credit score needs a little work?  Okay.  Here are some tips on improving your credit score.

1. Start by knowing what your credit score is.  Go to http://www.myfico.com/ and checking your scores.  You can no longer get your Experian score, but you can get those from TransUnion and Equifax.  These are your base lines.  For mortgages, it will be hard to get a loan if your score is less than 620, and quite honestly, you want it to be over 700 ideally.  If it's over 800, you're done!  Congratulations it probably can not get any higher, so don't sweat it.
2. Next review full copies of your credit report from each of the agencies. (Experian, TransUnion and Equifax).  You can get a free copy from many sites, including http://www.annualcreditreport.com/ and http://www.freecreditreport.com/.
3. Challenge every negative piece of information on any of these reports.... even if it is accurate.
4. Wait for responses.  Do your best to argue why any derogatory information should be removed.
5. Once you've gotten the reports corrected, look at what your most negative things are, like public records and collections.  When were they?  Most negative things fall off your credit report in seven years.  Let's say that 6 years and 9 months ago a collection was placed on your account for $500.  If you want to buy a house next year and are doing this credit repair process in preparation, the WORST thing you can do at this point is to pay it without an outside agreement.  Why?  Well, the reporting period is 7 years from the last date of recorded activity.  If you pay it now, it stays on your credit report for another 7 years starting now.... if you leave it alone, it disappears from your report in six more months.
6. Remember that, outside of public records and collections, it is your most recent activity that is most heavily weighted.  Make sure you are paying as agreed on every active account.  No exceptions.
7. Pay down your balances as best you can.  Part of your credit score is calculated by the balance of all of your accounts compared to the credit limits you have.  If you have $10,000 of credit, but are only using $2,000 of it, that is rated favorably, as it is indicative of someone who has responsible spending habits.
8. It is best to have a mix of types of accounts - Revolving credit (credit cards), and Installment loans (like student loans and car loans). 
9. If you are having trouble getting a credit card, get a secured credit card - put $500 in a bank and get a $500 credit card.  Use it (otherwise it won't be rated) and then pay it off, regularly.  In time, you will be able to have a credit increase and get unsecured credit lines.  But, from a credit rating standpoint, secured accounts are rated exactly the same as unsecured accounts.
10. After taking these actions, check your credit score again in six months.  Then, send me an email and let me know how much your credit score improved!

Congratulations on caring enough to start putting yourself back on the right track toward a healthy credit rating.  Remember, no matter what happened to ruin your credit, you can recover.  Time heals all wounds, including credit score wounds.

Demystifying Credit Scores: Pt 4 So What?

This is the 4th in a series of 5 mini posts on Demystifying Credit Scores.

Please be sure and read through the other posts, too.

Start here: http://therealestatewhisperer.blogspot.com/2009/10/demystifying-credit-scores.html

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In this final post of the series, I want to address the major question, "So What?"

When it comes to credit scores should we really care? 

Well, yes and no.  I use my (divorced) parents as a great example:

For nearly 20 years, my dad didn't have a bank account or a credit card or a car loan.  He bought a home with owner financing (because he had bad credit after the divorce).  He had no credit file at all.  But dear old dad usually had lots and lots of cash; and that's how he paid for everything.   He needed a new truck?  He bought in a stack of bills.  When there was an emergency, he pulled cash from his mattress (or whereever).

My mother, on the other hand, lived paycheck to paycheck.  The money in her bank account barely covered the bills expected to come in over the next 2 weeks.    But, she had great credit.  So, when she ran into challenges and her expenses were increased unexpectedly, she relied on credit to get her through - and it's always worked for her.

You see, the answer to the question "So What?" is "It Depends."  Will you need your credit anytime soon?  Are you planning ot buy a new car?  Rent an apartment?  Buy a house?  If so, then yes, it matters what your credit rating is.

Many will tell you if you have a couple of credit cards, a good car and a place to live, then if you do have to allow something detrimental (like a foreclosure or short sale) to happen to your credit report, it's not that big of a deal.  But, remember once you've defaulted on something, it's like lying to your parents, you have to regain trust.  You do that by rebuilding your credit.

The COST of a lower credit rating:

The actual cost varies, as does the actual point change.  But, according to an article published on November 29th on CreditCards.com, the following are examples of the actual dollars you could lose by having a lower credit rating:

If you had a 780 credit score, and paid 30 days late just once, on a 5 year $20K car loan, your interest rate could increase 3%, costing you $26 more a month.  If a debt settlement was reported (this is where a creditor agrees to take less than is owed to them in order to close the account and recoup some of what is owed to them), a $200,000 30 year mortgage rate would increase so that the loan cost you $109 more a month.




If your credit score was 680 before your 30 day late payment, the increase in your cost would be $41 per month; and a $200K 30 year mortgage would cost you $95 more per month.  After a debt settlement, you could no longer qualify for a credit card.

You see, these credit scores (specifically, the FICO score) is powerful.  I urge you to care about  your credit, but for you to balance the needs for credit with the needs for cash.  You can only live on credit OR cash for so long.  At some point, both run out...when you run out of one, you want to make sure you have the other.  It's best to have a mix.

If you've recently been in a situation where you let your credit rating fall, tune into my next post with tips on improving your credit score.

Demystifying Credit Scores: Pt 3 How Foreclosures and Short Sales Affect Your Score

This is the third of a series of fiv mini posts on Demystifying Credit Scores.

Please be sure and read through the other posts, too.

Start here: http://therealestatewhisperer.blogspot.com/2009/10/demystifying-credit-scores.html

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Short sales are slightly less damaging than a foreclosure to your credit score.... for about the first 12 months after its occurrence. 

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  If you are paying as agreed up to the short sale, for that duration of time, the loan is rated PAID AS AGREED, which is good.
  
  
  
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  It is possible, sometimes, to stay current on your mortgage and to complete a short sale. 
  
  
  
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  Once either the short sale or foreclosure is completed, both accounts are reported the same: PAID DEROGATORY, and therefore will affect your score the same from a numerical standpoint.  Dave used the analogy that it doesn't matter really whether you ran off the cliff or walked off the cliff, the point is you still went over the cliff.
  
  
  
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  After the short sale or foreclosure, the major difference in how it will affect your score relates to the balance that shows as unpaid (since balances for outstanding credit are a big part of the scoring model).  Short sales, as forgiven debt, will sometimes be reported with a zero balance. But, balances are only considered for 12 months.  So, one year after either a short sale or a foreclosure, the rating and numerical impact are the same.  Refer again to the jumping over the cliff analogy.
  
  
  Foreclosures can also become public records (this varies state to state).  From that standpoint, foreclosures can take a dramatically worse toll on your credit report than a short sale - as public records are weighted very heavily.  Here is where it can REALLY matter.
  
Accoring to a November 29, 2009 article by Jeremy Simon published on CreditCards.com, FICO has just revealed examples of point score drops for certain credit events, as follows:

If your previous credit score was 680: A Foreclosure would drop your score 85 to 105 points.  A Bankruptsy would drop your score 130 to 150 points. If your previous credit score was 780:       The Foreclosure's impact would be a 140 to 160 point decline. The Bankruptsy's impact would be a 220 to 240 point reduction. For examples of how this could actually COST YOU MONEY, see the post "So What".

Please note here that we are referring to CREDIT SCORES!  When it comes to buying a house after a short sale or foreclosure,  it is up to the lender as to how to underwrite these things.  Chances are that a short sale will be considered more favorably than a foreclosure during a loan application process. 

It's hard to know where the future of credit scoring or loan applications will go as we move past this part of our history.  But we can rely on past experiences and common sense to help us know what to expect.

Prior to this period in our history, we've been through other periods where people had many foreclosures or people did deed in lieu of foreclosure transactions with their bank.  I experienced many lenders who said, even if the person would otherwise qualify for a 100% loan, if they had a foreclosure EVER they could not receive 100% financing on a property. 

In fact, my dad was business partners with someone who had a previous foreclosure on his record.  The business partner had a very good credit score at the time, and had a current mortgage for a principal residence that had nearly 20 years of being in good standing.  But, after a couple of times of being told by lenders the partnership was better off not including him on loan applications, they just stopped doing it - and so my dad became fully responsible for all the business debt.

This type of underwriting attitude is likely to continue into the future, even as this period gets further and further behind us.

Demystifying Credit Scores: Pt 2 How Inquiries Affect Your Credit Score

This is the second post in a series of five mini posts of our series on Demystifying Credit Scores.

Please be sure and read through the other posts, too.

Start here: http://therealestatewhisperer.blogspot.com/2009/10/demystifying-credit-scores.html

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Continuing our series of posts on "Demystifying Credit Scores", this posts explains how credit inquiries affect your credit score.

There is a lot of misinformation floating around regarding how inquiries affect your credit report, and I finally feel like I have a reliable answer!!

There are two kinds of inquiries: Soft and Hard

Soft inquiries are done by insurance purposes, current creditors, and employers. These do not have a negative impact on your credit rating.

Hard inquiries are inquiries run whenever you’ve applied to borrow money from a creditor (credit cards, personal loans, mortgages, car loans, student loans, etc.). When you have a “hard” inquiry, it immediately deducts points from your credit score for each "unique" inquiry. Generally, the point loss is somewhere between 3 and 7 points, and you don’t get those points back for one year.

However, if you have multiple inquiries from a similar type of creditor – like mortgage loan inquiries from multiple companies, the scoring models do allow you to “shop around” without further deducting points. Experian allows you 14 days, TransUnion and Equifax permit 45 days.

Demystifying Credit Scores: Pt 1 All Credit Scores Are Not Created Equal

This is the first mini post in a series of five mini posts in our series on Demystifying Credit Scores.

Please be sure and read through the other posts, too.

Start here: http://therealestatewhisperer.blogspot.com/2009/10/demystifying-credit-scores.html

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The credit scores you buy on sites like AnnualCreditReport.com are NOT your FICO scores!!

They are typically your "Vantage Scores". Vantage Scores are rated on a scale of 501-990.

FICO scores are done based on the Fair Isaac scoring model, and are a range of 330-850. You can purchase these scores at http://www.myfico.com/  Most Creditors, including mortgage lenders, are basing their lending decisions on your FICO Score. 

Sites like AnnualCreditReport.com ARE a good source for pulling and reviewing the detail of your credit report.  You SHOULD review your credit report periodically to check for errors. 

Since most creditors do report to all three reporting bureaus, I actually pull a report from one of the three reporting bureaus every four months.  I often find errors, and when I do, I write letters to all three of the credit bureaus to advise them.

As a matter of practice, it is suggested that you challenge ANY negative information on your credit report, even if it is accurate.  Many times, the creditors or their collection companies will be so overwhelmed they will fail to respond within the time frame allowed and the bureau will remove the negative information from your file.

Home Prices Will NOT Return to 2005 Levels

"Home prices will NEVER return to the levels of 2005.  NEVER," said Roger Arnold, a well respected Global macro-economist, during a recent conference call with several Keller Williams Agents in the Northern Virginia area.  Of course, he meant that comment in the context of relative value when you consider affordability indexes (median home price compared to median area income), inflation, etc.

He is not discouraging buying a home today, just "calling it like he sees it" for existing homeowners, himself included (and me, too).  At this point, the artificial home price inflation peaking in 2005 or the beginning of 2006, has pretty much come and gone.  Even in areas where there is still fallout to come, prices are relatively low, and homeownership offers many advantages, financial and otherwise.

Locally, in the Washington DC metropolitan area, we're somewhat insulated from the national economic climate, but we don't go unaffected. 

Since 2006 and 2007, area homeowners thought they would "wait out the storm" by renting their homes for a year or two, rather than selling them, when life forced a move.  It's not that they couldn't sell, just that they wouldn't, because they wanted to get back that 2005 value... and they wanted it very, very much....enough that they couldn't hear what they didn't want to.

Sadly, the next couple of years saw continual price decline.  It caused additional fallout, with even more homeowners letting go of those "second homes" to foreclosure when they realized they simply didn't have the reserves to withstand the storm.  They had drained their savings, and run up credit lines.  Even if their homes were rented, being a landlord turned out to be a much harder job than they thought...and it wasn't making them any money.  The flooding of the housing market with so much similar inventory all at once caused home sales to slow to a crawl, and in some areas to a complete halt.

At this point, our inventory was mostly post foreclosed, bank owned homes (REOs)....and a few traditional sellers who had their homes on the market for about $100,000 above the neighboring REO.  The traditional sellers were being laughed at by buyers, and REALTORs were shaking their heads.  Some agents would even shy away from taking traditional listings entirely.  The REO homes had previously been owned as rental homes by investors; or starter homes by people who had already moved into their next "move up" home without selling their first house; or by people who never should have been buyers in the first place.  Essentially, our market was flooded with an inventory of homes at similar price points, and all in direct competition with one another.  So many choices, and nothing was selling. 

In 2008, desperate to move some houses, banks began holding public, well marketed, auctions.  What they, and the rest of the world, discovered was that prices weren't low enough.  But, when they were, buyers would come out of the wood work.  So, in 2008, even when many thought prices may had already "flattened", Loudoun homes saw a sudden and dramatic 10% price drop in a matter of a few months; and the buying frenzy began. 

Since then, we've seen continual competition for well priced homes.  REALTORS began to be able to predict market values again since there was some stabilization... at least within that segment of the market.  Perhaps because we could set expectations properly, the same people who did not want to sell their homes in 2006 and 2007 (because they didn't want to give up value) were now ready to sell. 

Wait!  What was that?  You got it.  A homeowner unwilling to sell in 2007 at $300,000 because they were going to wait until they could sell it for $400,000 again were suddenly willing to sell at $225,000 in 2009?  Yes.  The sellers trying to time the market lost, big time.  In fact, some where now under water, but were willing to face the fact that they could no longer hold on, and started talking about options to foreclosure (i.e. short sales).

With 2009, we've seen more traditional (non-distress, non-bank owned, non-short sale) sales re-emerging in the marketplace, which is what buyers really want.. but inventory remains low.  So, premiums are being placed on these homes, and fierce competition ensues.  Prices are going back up, for all types of sales, but most especially for well cared for homes which are not short sales.  In 2009, we've regained most of the value we lost in 2008. 

But now the greed is re-emerging and it is scaring me.  Sellers, seeing that prices have started to regain value in 2009 are saying that they have new faith that prices will continue to go up, and they seem to think by next year, or the year after, they will be back up to 2005 prices.  No, it's not likely.   I don't think so, and neither does Roger Arnold, or any other REALTOR or economist that I know.

My message here:  Please, don't try to time the market.  If life is suggesting to you it is time to move up, move out, or move on... do it. Sell for what it's worth and make the best of it.  I am talking here, mostly, about principal residences... and telling you that if you didn't mean to be a landlord, you shouldn't be.  And, you need to seriously calculate the cost of a vacant home before you allow it to stay that way.

Besides, if you are moving out of that "starter" home as a move up buyer, or to relocate, then you are likely going to get the best end of both markets - seller's market conditions when selling, buyer's market conditions when buying.  What more could you ask for?  You would not have gotten that benefit in 2005. 

Looking at value rather than prices, it may very well be prudent for you to consider making your move now, while interest rates are lower and buyers have buying power, while inventory is low and buyers have little choice and are paying premiums and competiting not just on price but on terms.

Remember, most homeowners who thought, in 2007, thought their 2005 values would have returned by now.  It hasn't, and it's cost them money - a lot of money - over the past two years.  They have seen their dreams shattered and finances ruined by trying to time the market.  Don't make the same mistake. 

Here's an example of someone who's in denial over market conditions - it's a bit humorous, but after reading this blog and watching the video, look in the mirror.  You're not doing the same thing, are you?
http://therealestatewhisperer.blogspot.com/2009/08/in-economies-like-ours-its-hard-to-know.html

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My advice here is NOT one size fits all. 

For a personal consultation in the Northern Virginia/Dulles area, please contact me at:

http://www.vickychrisner.com/

703-669-3142

VChrisner@KW.com

And, stay tuned to http://www.therealestatewhisperer.blogspot.com/

for more news from the front lines of real estate!