Dear Liz: Do I need to stop making payments for my bank to consider a short sale? I moved and put my house on the market a year ago but got no bites despite three price reductions. The only way I'm likely to sell it is to reduce the price below what I owe the lender. I want my credit to remain as good as possible, but I worry that if I have to miss payments to get the lender to consent to a short sale my scores will be lower than if I had kept up the payments before selling short.
Answer: Lenders have different policies on short sales, which is when they agree to let a borrower sell a home for less than what is owed on the mortgage. You'll need to talk to yours about what's required. But expect your credit scores to take a major hit, whether or not you stop payments first.
A short sale typically will have the same effect on your credit scores as a foreclosure, according to Fair Isaac, the company that created the leading credit scoring formula, the FICO. Fair Isaac recently released a chart showing the effects of various credit score blows, from a missed mortgage payment to a foreclosure or a short sale with a deficiency balance (the difference between the home sale proceeds and what you owe). Someone with FICO scores in the 780 range would lose 90 to 110 points with a single skipped payment. A short sale or foreclosure would trim 140 to 160 points from that 780 score. (You can see the charts at Fair Isaac's Banking Analytics Blog at http://tinyurl.com/3eze2a5.) Your score will plummet that far whether or not you stop making payments before the foreclosure or short sale.
You might be able to reduce the damage from a short sale if you can persuade the lender not to report the deficiency balance to the credit bureaus. Short sales without a reported deficiency balance would trim 105 to 125 points from a 780 score, according to Fair Isaac. But lenders that have been cajoled into a short sale often aren't in the mood to grant you additional favors.
There are some advantages to a short sale over a foreclosure. One is that you can start the long road to credit recovery sooner because foreclosures usually take much longer than short sales. The other bit of good news: You can qualify for another mortgage faster. Lenders typically will consider you for a home loan two years after a short sale, versus a wait of up to seven years if you let the current lender foreclose.
Dear Liz: I sent my tax preparer everything he needed for my return, including the originals of my W-2 forms, bank 1099s, property tax bills (including a copy of the check showing the payment) and a year-end mortgage statement. A week later he said it was done and that he had mailed the return and paperwork back to me. It's been three weeks and I still haven't received the paperwork. What I did get was a direct deposit of my refund, so apparently he filed the return without telling me. I am sick to death that all my private financial information is floating around in the mail system somewhere and that it could get into the hands of a dishonest person.
Answer: You've learned a couple of lessons, foremost among them that you need a new tax pro. Filing your return without letting you see it was a definite no-no.
Another lesson is that your private financial data probably shouldn't be entrusted to the U.S. mail system. It's more secure to drop your documents off with your tax preparer and pick them up yourself, along with a copy of your return, when he or she is done. The original return can be electronically filed using the Internal Revenue Service's secure, encrypted system, eliminating the need to use the mail.
You can put 90-day fraud alerts on your credit reports at the three major bureaus (Experian, Equifax and TransUnion). Fraud alerts notify lenders that they should take extra steps to verify identity before opening accounts in your name. For more protection, you may want to consider a credit freeze, which doesn't rely on lenders' sometimes-wavering vigilance but allows you to shut off access to your credit reports, preventing thieves from opening new credit accounts. For more information, visit the Consumers Union site at http://www.financialprivacynow.org.
Liz Weston is the author of the book "The 10 Commandments of Money: Survive and Thrive in the New Economy." Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604 or via asklizweston.com. Distributed by No More Red Inc.