Reverse Mortgages Versus Short Sales

by Peter G. Miller
June 10th, 2008

If you’re a senior and have financial difficulties, which is better: A short-sale or a reverse mortgage?

With a short-sale you sell your home at a discount — and the lender accepts less than the full mortgage balance to make the deal work.

The only reason a lender will agree to take a loss with a short sale is that it believes it will have even bigger costs if the property is foreclosed.

But why should a lender take any loss? If the value of the property goes up the lender does not get a share of the profits so why should the lender take a loss if the value of a home declines?

In terms of credit, a reverse mortgage can allow you to pay off the existing mortgage on your home — and as a result eliminate a huge monthly payment. That’s good for your cashflow and also good for your credit standing because a reverse mortgage is not a negative item.

Also, of course, with a reverse mortgage you get to stay in your home while with a short-sale the property is sold and you must rent it back or move elsewhere.
Fair Isaac Corporation — developer of the most widely-used credit scoring systems — explains that for purposes of credit reporting a short-sale is no different from a foreclosure. Few events, of course, are more damaging to credit scores than a foreclosure.

Here’s what the company says at its MyFico.com website:

Are the alternatives to foreclosure any better as far as my FICO score is concerned?

“The common alternatives to foreclosure, such as short sales, and deeds-in-lieu of foreclosure are all “not paid as agreed” accounts, and considered the same by your FICO┬« score. This is not to say that these may not be better options for you from a financial perspective, just that they will be considered no better or worse for your FICO score.

“If you are considering bankruptcy as an alternative to foreclosure, that may have a greater impact to your FICO score. While a foreclosure is a single account that you default on, declaring bankruptcy has the opportunity to affect multiple accounts and therefore has potential to have a greater negative impact on your FICO score.”

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One Response to “Reverse Mortgages Versus Short Sales”

  1. NickD Says:

    This whole article makes no sense. For an owner to take a reverse mortgage, you’re paying them their equity in monthly installments. For a short sale to be completed, the home has negative equity….