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Will a Short Sale result in bad credit on my credit report?

Real Estate Short Sales and Foreclosures - Will a Short Sale result in bad credit on my credit report?

A real estate short sale occurs where the borrower, with lender approval, is able to sell their property for an amount less than the loan due on the property.  This results in the lender is getting less than the amount of the loan due. Not all lenders will accept short sales. Not all borrowers or properties qualify for short sales.

Foreclosures are generally events when the borrower does not make the loan payments as agreed and returns the property to the lender either voluntarily or subject to a foreclosure proceeding.  A foreclosure does not always mean the property is valued at less than the loan due.

Both short sales and foreclosures will likely be reported as derogatory items on your credit reports and will impact your ability to get favorable credit terms for up to seven years.

Fannie Mae has also published new guidelines (3/08) that may prohibit foreclosed borrowers from getting a mortgage loan through Fannie for five years except in cases with extenuating circumstances.

Lastly, be advised that the IRS may treat the deficiency balance between the loan amount due and the loan amount collected by the lender as a forgiveness of debt that is subject to federal income taxes.

So, before pursuing a short sale or foreclosure, be aware that there are many factors to consider that may have relatively long term effects on your ability to obtain credit in the future. It’s best to consult your attorney first and see what your options are before just assuming “everybody’s doing it”!

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