Short Sale or Foreclosure?
Homeowners face a tremendous burden not being able to keep up with monthly mortgage payments. Foreclosure is an event that keeps on affecting you long after your home is repossessed. A foreclosure history can be devastating to your credit score. A Short Sale can keep you safe from foreclosure and will not be as damaging.
Foreclosure Versus Short Sale
Foreclosure involves a lawsuit in which a bank, a mortgage company, or other lien holder seeks to take an owner’s property to satisfy a debt. The bank or lender may actually take ownership of the property or have the property sold to pay off the debt. As a result of the foreclosure, the owner loses whatever rights he or she had in the property. A foreclosure notice is any one of several documents that are filed, presented or posted during the foreclosure process. Once you have missed a couple of mortgage payments, your mortgage company will send letters stating that foreclosure is imminent. But these first communications are not foreclosure notices. They are the mortgage company’s attempts to get you to bring your loan up to date. An official foreclosure notice, or Notice of Default, will be filed only when no other options exist.
When you talk with your mortgage company, disclose the details of your financial situation and ask your lending officer what options he can offer you such as a short sale. Your mortgage lender will lose money–typically $60,000 or more, according to Freddie Mac–if your home goes into foreclosure. So the mortgage lender has a high financial stake in making sure that you never receive an official foreclosure notice. To this end, your lender’s loss prevention experts are working for you, as well as for your lender. Your lender will most likely consider a short sale on your home if you owe more than the actual value.
Of all available options, foreclosure is the most harmful - The inevitable result of a foreclosure is the lender taking your house. Not only will you lose your house, but the lender can get a judgment against you for the arrearages you owe plus his costs for the foreclosure action. If that isn’t enough, your credit report will be in terminal condition for many years to come, worsening an already bad financial situation and making it very difficult to obtain any other kind of credit. There is no upside to foreclosure. It should be avoided at all costs.
How is the Seller’s Credit Affected?
According to David Steep, division manager at Vitek Mortgage, sellers will take a bigger hit on their credit report by going through foreclosure or giving the lender a deed-in-lieu of foreclosure. Steep says the points lost on a FICO score are as follows:
- Foreclosure or Deed-in-Lieu of Foreclosure - Both of these solutions affect credit the same. Sellers will take a hit of at least 280 points. This means if a seller’s FICO score before foreclosure was 680, it could dip as low as 400.
- Short Sale - The affect of a short sale on a seller’s credit report is much less damaging. The ding on credit will show up as a pre-foreclosure in redemption status, Steep says, which will result in a loss of 80 to 100 points. This means a short sale with a previous FICO of 680 will see it fall to 580 to 600.
Waiting Period Before Buying Another Home
- Foreclosure or Deed-in-Lieu of Foreclosure - A seller who wants to buy another home after foreclosure will end up waiting about 36 to 60 months before a lender will offer any kind of interest rate that makes sense.
- Real Estate Short Sale - The good news for short sale sellers is the wait is much shorter before buying another home. “They can buy again in about 18 months at a good interest rate,” says Steep.
Considering the advantages to a real estate short sale when foreclosure is looming - A real estate short sale is a popular option for homeowners mired down with financial problems. Your lender may offer financial Incentives for you to short sale your home. Lenders are known to offer $3,000 for relocation assistance at closing. First, you will need to find a qualified and experienced real estate agent who specializes in short sales. Click here for a list of qualified short sale Realtors in your area. After find an experienced short sale Realtor in your area you will need to contact your lender to provide them with the Realtors contact information. You can also write a hardship letter to your lender explaining why they should agree to the short sale and why they need to include cash relocation incentives. Include the Realtors information in your letter. Lenders are agreeing to short sales in more and more situations due to the recent economy. Experts advise pursuing this option the minute you realize that you are falling behind in your payments and most likely won’t be able to catch up. The longer you wait and the greater the amount you are in arrears, the less time you will have to discuss a short sale.
Considering the disadvantages of a real estate short sale - The Seller’s credit will suffer with a short sale, but not like a foreclosure, which is more damaging and will hang around much longer. While a short sale will save you from foreclosure, it will also have a negative effect on your credit score, frequently lowering it by as much as 1 – 200 points. This can be overcome more quickly than the black mark of a foreclosure, especially if you manage to retain one or two credit cards and keep them current. There is new federal legislation called the Mortgage Forgiveness Debt Relief Act 0f 2007 that went into effect on January 1st, 2008. The new act can essentially eliminate the difference between the mortgage balance and the amount realized from the short sale to be non taxable as income. Your short sale Realtor can request your lender to forgive the mortgage balance difference in your short sale letter.
Foreclosure should be the last option you consider - Do everything you can before foreclosure occurs and do it as quickly as humanly possible. Once the court has granted your lender the option to foreclose it is too late to consider other options so DON’T WAIT!!!
Homeowners can have a tremendous burden lifted by Not Doing This Alone! - Facing foreclosure alone can be traumatic. You can successfully short sell your home with the help of a qualified and experienced real estate agent at NO EXPENSE TO YOU. Having a representative work for free on your behalf relieves stress and can speed up the process.
There has been a lot of stories over the past couple of years about people who willingly walk away from their homes even though they can still afford to pay for them. Fannie Mae is trying to crack down on those people by instituting a policy that says if you walk away without trying to work something out on your mortgage (short sale or loan modification) then it will be 7 years before you can get another Fannie Mae mortgage.
According to Short Sale Daily News, below are the Fannie Mae requirements for distressed homeowners who are unable to modify their loan:
- 1) If you Strategic Default or ‘walk-away’ you cannot buy for 7 years
- 2) If you deed in lieu of foreclosure you cannot buy for two years (reduced down from four years) and must have 20% down. If it has been four years you only need 10% down. In almost all cases you will need to pursue a short sale before your lender will consider a deed in lieu of foreclosure.
- 3) If you Short Sale – you can also buy in two years with 20% down or four years with 10% down. If you can prove extenuating circumstances for the need to short sale then you may only need 10% down at the end of two years. Extenuating circumstances would require evidential support of dire circumstance like job loss.That depends on terms of agreement with lender. If you do a short sale, part of the negotiation with the lender could be to have the account marked as paid as agreed. It’ll probably be easier to obtain if property is not too deep underwater and you’ll need to negotiate for this of course, just like you need it in writing that no further debt will be owed upon short sale.
The Fannie Mae waiting period starts the day after foreclosure is filed or the short sale is closed.
Find a qualified short sale Realtor who can assist you
Learn more about the FORECLOSURE process
Tell me if I qualify to short sale?
When is it too late to short sale?
Why should I consider a short sale?