Short sales and other alternatives
Bankruptcy is not the only alternative to foreclosure. A substitute is a short sale, which occurs when a lender agrees to allow a homeowner to sell a property for less than what the owner still owes on the mortgage.
A deed-in-lieu of a foreclosure is another alternative. It occurs when homeowners deed their home to the bank without going through the extra time and cost of a lengthy foreclosure process.
"Homeowners can only qualify for a deed-in-lieu of foreclosure if they have just one mortgage or if they have multiple liens from the same lender," Olsen says.
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According to a Q&A on the site, "Credit bureau reports are limited in how they represent foreclosures today, so it's generally not possible to tell from the credit report if a reported foreclosure is a short sale, deed in lieu of foreclosure, settled account, regular foreclosure or some other variation."
The site goes on to state that foreclosures and their alternatives are all treated as "serious delinquencies" on a credit report and that the alternatives "will be considered no better or worse for your FICO score" than foreclosures.
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"A lot depends on how the bank reports a short sale," Olsen says. "Most often, it will be reported as a 'settled debt' but it can even be listed as 'paid in full' by some lenders."
Even if the borrower can win this concession, some credit damage may already have occurred in the months leading up to the short sale, says Jacob Benaroya, president and managing partner of the Biltmore Capital Group, buyers and sellers of nonperforming mortgage loans based in Rochelle Park, N.J.
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Two other techniques often used to stave off foreclosures -- loan modifications and refinances -- may actually boost a borrower's credit score, Benaroya says.
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