Expert: Regan Shinski - 4/9/2010

Question
QUESTION: Hello. First off, I would like to thank you for your time. Its very much appreciated.
My big question is how willing are lenders to agree to a short sale if I continue to make my payments?
A few weeks after my wife and I got the best news of our lives (shes pregnant), I learned that my company was closing shop.
We both had a very healthy income (she still does) and we are still able to make our payments without having to dip into our savings.
However, this will soon change with the baby. I tried to apply for a loan modification but we were told that we wouldn't be able to afford the loan even if they modified it (weird).
I soon plan to start my own business and would like to maintain my credit score. So is it likely that I could get my lender to agree to a short sale without withholding payment(s)? And if they do, will my credit score still be effected? If so, how bad will it be hit?
I thank you in advance for your time.
Sincerely,
Scott

ANSWER: Hello Scott:

It is unlikely a lender will take a short sale while the loan is current.  Most will only take a short sale when there are no other options to retrieving the full value that was loaned.  Right now, they likely see their best option as you paying on time as you have!  They also are not going to let you repay a part of your loan (short sale) and walk away with pristine credit.

Now, I won't say it has NEVER happened but I've never heard of it.  However, you should try or consider ALL your options (short sale, renting it out, bankruptcy, etc.) before starting to miss your payments.

BTW, even if you get a loan modification, it reports as late to the credit bureaus during your trial period.

The specific impact on your credit score is too hard to predict.  In general, the better the starting score, the bigger the negative impact.  Late payments have less of a lasting impact than a foreclosure or bankruptcy.

Sorry, I wish I was more optimistic on your request but you should still try it.

Regan

---------- FOLLOW-UP ----------

QUESTION: Thanks so much.
I'm not looking for pristine credit as much as average.
The difference on what I owe and the home's value is about 10K. Would that make a difference in their decision? My payment is 3,200 a month. If I was to withhold payment for three months before they even are able to start the foreclosure, they are out another 10k (at the very least) and the home will still be have to be sold for the 10K less than my loan.
I may be naive or missing something. But isn't it clearly in their best financial interest to keep me paying while also selling the house much sooner than it is to loose several months worth of payments, accrue additional legal costs all the while the house off the marke?.
Both scenarios end up with the house on the market. In one they loose 15k. The other, they loose 3-4x that.
Thanks again for your time and help. From what I've been able to gather elsewhere, you're assessment of the situation will be accurate.
I still don't understand their reasoning though.
Take Care,
Scott

Answer
No one says those lenders make sense!  They just have certain hard rules they adhere to and they think if let people off (pay less money) without the "punishment" of damaged credit, it will open a whole can of worms for them.

If you are truly only $10,000 down on a home with a $3200 payment, you should look at other options.  Most notably, look at concessions from your realtor or concessions from your buyer.  A post-closing loan to pay the difference should also be a possibility.  Even selling some of your personal property or other assets to make up the difference should be on the table to protect your credit.

Good luck,
Regan