Foreclosures, Short Sales and Credit Ratings

Foreclosures, Short Sales and Credit Ratings2024-07-17T13:28:01-07:00

Regardless of the means by which they seek debt relief, many people will observe some effect on their credit rating as they take steps to rebuild financial strength. But Chapter 7 bankruptcy, Chapter 13 bankruptcy, and debt settlement strategies offer such potent relief to individuals and married couples that this can be merely a speed bump on the road to financial recovery.

For those who, like many Arizona homeowners, have negative equity in real property like a home, investment property or vacation residence, an involuntary foreclosure, loan modification or short sale may be the best way to proceed. A Phoenix debt relief lawyer can help you understand the long-term implications of these options and help you assess which choice meets your unique goals.

A recent study by the Fair Issac Corporation (FICO) took a close look at how mortgage delinquencies impact FICO scores, which are a primary factor in mortgage lending decisions. The study looked at three hypothetical consumers with baseline FICO scores of 680, 720 and 780, and showed an average reduction of about 70 points for borrowers who are 30 days late on mortgage payments.

Not surprisingly, the decrease continues for borrowers who are 90 days late, but the effect is minimal for the borrower who started with the lowest score. However, the most interesting finding was that the FICO score effect was essentially the same for property owners who chose to let the foreclosure process take its course and those who completed a short sale with a deficiency balance (meaning the sale proceeds did not eliminate the amount owed on the original mortgage). Other strategies, such as deed in lieu of foreclosure and debt settlement, had a lesser effect on the credit score.

The study produced similar results when assessing how long it takes for FICO scores to recover. Not surprisingly, it takes considerably longer for a borrower with a higher score to recover from the negative effect of late payments, short sales or foreclosure.

Beyond the limited considerations of hypotheticals, a wide variety of factors play into a proper consideration of whether bankruptcy or another option will best serve an individual’s needs. A consultation with an Arizona bankruptcy attorney can help potential clients make informed choices that target future financial health.

Legal Insights On Foreclosure And Short Sales

Understanding the complexities of foreclosure and short sales can be daunting, thankfully a Foreclosures, Short Sales and Credit Ratings Lawyer can help. With over ten years of legal experience, we at Wright Law Offices are here to offer clarity on some of the most common questions we encounter. Below, are some legal insights to help you make informed decisions about your property.

What Happens When We Miss Mortgage Payments?

Missing mortgage payments can lead to serious consequences, including foreclosure. Typically, lenders allow a grace period before considering foreclosure. Communication with your lender is crucial; they may offer alternatives such as a repayment plan, loan modification, or forbearance. Proactive steps can prevent foreclosure and protect your credit score.

How Does Foreclosure Affect Our Credit?

Foreclosure significantly impacts your credit score, often dropping it by 200 to 300 points. This negative mark can stay on your credit report for up to seven years, making it challenging to secure new loans or credit lines. However, taking steps to improve your credit post-foreclosure, such as timely bill payments and reducing debt, can gradually restore your creditworthiness.

What Is The Difference Between A Foreclosure And A Short Sale?

Foreclosure occurs when the lender takes possession of the property due to non-payment. This process is typically initiated after several missed payments and can result in the homeowner being evicted. A short sale, on the other hand, involves selling the property for less than the outstanding mortgage balance with the lender’s approval. This option can be less damaging to your credit than foreclosure and may provide more control over the sale process.

Can We Still Live In Our Home During A Short Sale?

Yes, you can remain in your home during the short sale process. The sale itself can take several months, and during this time, you are still the property owner. Staying in the home can also help maintain its condition and curb appeal, potentially attracting more buyers and facilitating a smoother sale.

Are There Any Tax Implications With Short Sales?

Short sales can have tax consequences. The forgiven debt in a short sale is considered taxable income by the IRS. However, there are exceptions and relief options available, such as the Mortgage Forgiveness Debt Relief Act, which may exclude the forgiven debt from taxable income under certain conditions. Consulting with a tax professional can help you understand your specific situation and available relief options.

Taking Action

Facing foreclosure or considering a short sale can be overwhelming, but you don’t have to go through it alone. Our team at Wright Law Offices is here to provide guidance and support every step of the way. If you have more questions or need personalized assistance, don’t hesitate to reach out to us. We’re committed to helping you find the best solution for your circumstances, as you discover your fresh start. Contact us today to schedule a risk-free consultation and take your legal first step toward resolving your property concerns.

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  • 1. Bankruptcy is our sole area of practice. Attorney Wright has over 10 years of experience in the field of bankruptcy and has helped over 1000 people successfully file.
  • 2. Attorney Wright has an accounting background that is useful in analyzing complex financial documents. Prior to law school he obtained a degree in accounting from the University of Wisconsin School of Business. He exercised his strong numerical aptitude in the field of accounting, including several years with The Kohler Co., before ultimately deciding to pursue a law degree.
  • 3. New clients meet with an attorney during their first visit. We understand your time is valuable. It is important your questions are answered quickly and accurately so you can take appropriate steps to secure a better financial future and eliminate fear and stress.
  • 4. In business, referrals are the highest form of professional compliment. We frequently receive referrals from other lawyers and previous clients.
  • 5. Our firm is small which enables us to focus on quality over quantity. We don’t have billboards on the I-10 or banners affixed to public transportation. Our approach is a bit more understated. We care about people and doing things right and it shows in our low employee turnover and positive reviews.
  • 6. Perhaps the most important consideration is the cost of filing bankruptcy. We continuously assess our fees to ensure we offer fair and competitive pricing. We want to offer you a deal without sacrificing the quality of your experience.
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