Dear Liz: In 2005, I purchased a town home for my children, and they have since vacated the property. The town house is now worth 60% of what I owe, and I am considering a short sale. All my other obligations are current with no late payments in years. My credit scores are over 800 and my only other debt is a car payment. After a short sale, what kind of hit can I expect on my credit score, and about what would be the recovery time for my credit score?
Answer: The creators of the leading FICO score haven't revealed enough about how the formula works to predict precisely how a short sale would affect your scores. But the company has said the affects of a short sale are similar to that of a foreclosure, which would cause someone with a 780 score on the 300-to-850 FICO scale to lose 140 to 160 points. People with higher scores tend to lose more points to a black mark than people with lower scores, so you can pretty much assume that your scores will drop from excellent to near-subprime territory for a while.
Exactly how long your score will take to recover is another mystery, although you'll start to see gradual improvements if you handle your other credit accounts responsibly. Your scores could climb back into "good" territory (over 700) within a couple of years, but you may not regain your lofty peak until the short sale falls off your credit reports in seven years.
You also should be cautious about any agreement you sign with your lender. Some short sale agreements don't address what happens to the unpaid debt, while others specifically keep you on the hook for any deficiency balance (the difference between what you owe and the price the home fetches). Ideally, you would want this debt to be forgiven (although you may owe taxes on the forgiven debt). Otherwise, the lender could sue you and cause further financial and credit score problems.
If a short sale is indeed your best option — you can't rent the place for what it costs you to own it, and simply wait for prices to rebound — you'd be smart to get experienced legal help.
Online degrees can have value
Dear Liz: I wanted to comment on something in a question you recently answered. The person was concerned about her $40,000 debt for her two-year paralegal studies degree at a for-profit online university. In your response you very correctly cautioned her about the problems that for-profit institutions have been creating for students and the fact that they are being looked into by the Government Accountability Office.
This is great information, but some readers may assume all universities that offer online programs are for-profit and inherently suspect. Many not-for-profit institutions offer very high-quality programs, many of which are online or hybrid. I work for a well-respected, nonprofit university that offers many programs online. I am sure that I speak for many who work hard to offer quality programs online: We deserve to not be lumped together with for-profit schools that do not have the students' best interests at heart.
Answer: Your point is well taken. Online degrees aren't inherently worthless when they're offered by well-respected, accredited institutions. But anyone considering a degree from a for-profit college, either online or off, should investigate the school carefully.
One place to start is searching the U.S. Department of Education's site at http://www.ope.ed.gov/accreditation to see whether the school is accredited.
If it is, the next step is to determine whether its programs are the best fit for your needs or if you could get your education for less from a nonprofit vocational school or community college. Many times, you can.
Finally, double-check any school's claims about the availability and pay of the job for which you're training. The U.S. Department of Labor site at http://www.dol.gov has statistics showing projected job growth and pay for a long list of positions. It's worth doing the research before you commit.
Liz Pulliam Weston is the author of the book "Your Credit Score: Your Money and What's at Stake." Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or via the "Contact Liz" form at http://www.asklizweston.com. Distributed by No More Red Inc.