Debt is forgiven, but not forgotten

Settled accounts, such as short sales, deeds in lieu of foreclosure (when the seller signs over the deed of trust to the bank) and foreclosures result in a "risky" rating on credit reports for seven years, Sweet said. That makes car and other credit purchases more difficult. Also, borrowers with a short sale or foreclosure on their records now have to wait five years, instead of four, to get a Fannie Mae-backed loan. The increase went into effect June 1. The wait for Federal Housing Administration loans is three years.

A possible silver lining is that mortgage lenders sometimes include factors other than credit scoring to determine whether to approve a loan, such as a borrower's assets and investments and the fact that the borrower didn't walk away from the home. But those factors count only when a lender manually reviews an application, experts say. Most are not going the time-consuming manual-application route these days, however.

So why not just let the bank foreclose on a property and avoid the hassles of a short sale?

"With a short sale, owners can end the bad nightmare . . . and move on," Sweet said. "They'll have problems getting another loan for a while, but it's better than a foreclosure, where they risk an eviction."

A better alternative to a short sale or a foreclosure, lenders say, is a "loan modification," which sometimes allows owners to stay in their homes.

Result: affordable

Here's how it works: When monthly payments become unaffordable, the bank reviews the owner's income, expenses and other variables, then offers to lower the interest rate and extend the term of the loan. The end result is a monthly payment the owner can afford, according to a loss-mitigation- department spokesman at GMAC Mortgage.

Sherri Frost, a senior loan officer with Metrocities Mortgage, represents a seller whose monthly mortgage payment on a $525,000 loan was $3,000. With his loan modification, he's now paying 2% fixed interest for two years, then 4% for the following two years and a bit over 5% for the five years after that. His monthly payment is $1,700 for the first two years. "He can swing that," she said.

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diane.wedner@latimes.com