how much damage does a short sale do to credit?

Question

I am looking to buy a specific property but the guy is underwater.  He's willing to take a loss but so far discussion is just paying off what he owes as the sales price.  At first I didn't think there would be much difference in his loan payoff and the value but now it is proably $20,000.00 give or take.  I was thinking of offering him a little cash incentive that he could walk away with some money if he was willing to do a short sale.  I know this would damage his credit but not sure how much and for how long if he would consider it or not.  He was not seeking to sell I approached him so not that motivated but he would like to move up north... anyone know about this or maybe have any other options for me to obtain this property?

Victoria Dennis · Answer

@Christopher Phillips thanks so much for the insight..... it probably isn't going to work for me but thought I'd give it a try.....  :)

Christine Mwai · Answer

Thanks. My credit took a big BANG, rebuilding it slowly but surely. I have great free and clear properties. If you know of any lenders that are able to do an asset based loan/ cash out, kindly let me know. (My properties are in AL).

Christine Mwai · Answer

I did not know 150 to 160 points is considered  a minor impact to one's credit. Nor did I know FHA loans now approve a score of 500. Kindly list lenders that do FHA 500 score loans.

Darrell Cropper · Answer

My experience as a mortgage underwriter is that the back to work program is really hard to document.  Likewise, extenuating circumstance is difficult to document.  It does require a hardship that meets specific requirements as referred to in a previous response.Otherwise the standard 3 years for fha and 4 years for conventional must pass to purchase through one of these avenues.

Christopher Phillips · Answer

@Victoria Dennis

It's possible to do FHA with 1 year with their back to work program. FHA FICO minimums are now 500. So, with the right down payment, it's possible to get a home again relatively quickly depending on the circumstances of the shortsale.

Conventional is now 2 years after a shortsale, but requires some sort of extenuating circumstances and 20 percent down. Four year wait with 10 percent down. 7 years with less than 10 percent down. Lenders usually require FICO 620 or above for a conventional loan. So, the owner would have to have the down payment and the FICO to get loan as early as possible.

But it comes down to the current circumstances of the hardship and what his credit looks like at the time.

Word of advice many people on BP would tell you, don't pay more than you need to get the deal. Also, never take on other people's headaches. Run the numbers and offer what you need to make the numbers work. If the number don't work they don't work. Shortsales take forever, if the owner isn't that motivated or the lender drags along the process, you could be still working on this a year from now.

Victoria Dennis · Answer

@Christopher Phillips

Thanks for the reply :)

So 150 points seems like more than a minor impact?  So it takes 3 years to get a FHA loan again if he was behind but if he wasn't how long would it take?  and excuse my ignorance but why do you mention the FHA vs. conventional?  Can he get a conventional?   I just really want his property (for a number of reasons) and I'm trying to find a way to make this happen since its not worth what he owes.  I don't mind paying a little more than I should but I don't want to take a bath..... never know where the market is going also he is borderline hoarder and will need a lot of money to fix it up so then it would be even more in the hole... you have any other ideas for me?  lol

Christopher Phillips · Answer

@Victoria Dennis

Initially, being behind in payments will impact his credit. If he isn't behind, but just doesn't have equity, the shortsale itself will have a relatively minor impact around 150 to 160 points on their FICO. There will only be a note about a charge-off or settled for less than amount due...

After a shortsale, he can potentially buy a new home relatively quickly. No wait if he isn't behind in payments. 3 years to use FHA if he is behind in payments. Less if there are special circumstances.

However, a lender won't approve a shortsale unless he can show a case of hardship (loss of job, reduced wages, medical illness, having to move for a job).

how much damage does a short sale do to credit?

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