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Short sales trash credit scores, too

May 18, 2009 | | Comments Comments Off

Dear Liz: We bought a house five years ago for $410,000 that is now worth $250,000. Meanwhile, our income in the last year has decreased by about $30,000 annually. We are trying to work with our lender to stay in our house, but things are tight and we don’t know how much longer we will be able to keep making payments on this house.

What would be the downside of doing a short sale, renting for a couple of years until we could buy again? It seems like we would be able to save up while we were renting, and I can’t see house prices doubling in the next two years. What do you think would be our best option?

Answer: You’re right that home prices won’t recover their lost value any time soon. But that alone isn’t good reason to bail on a mortgage, particularly given the fallout such a move can have on your finances.

The damage to your credit will be significant. Short sales — selling a home for less than what’s owed, with the lender’s consent — typically harm credit scores as much as foreclosures do.

And these days it’s harder to recover from a serious credit blow than it used to be. Fewer lenders are willing to take chances on those with subpar credit.

You may be able to qualify for a mortgage again within a couple of years, but you’ll probably pay higher rates for all your credit for several years.

If you can’t work something out with your lender and can no longer afford the payments, you may not have much of a choice. But given the stakes involved, you should explore all your options for saving the house before you turn in your keys.

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