Mar 17 2010
Foreclosures, Short Sales and Loan Modifications
With the foreclosure rate at an all time high, how are people managing their options in this complex real estate market?
Real estate values have decreased forty percent or more in many places from their highs set a few years ago and unemployment in various places around the country is above the ten percent mark. Throughout the country, more than thirty percent of individuals who own their homes owe more than their houses are worth. Better than one out of every eight home loans are delinquent in some respect, and there doesn’t seem to be an end in sight.
If you are in the position of defaulting on your home loan, you basically have three options: a loan modification, a foreclosure or a short sale. The pressure these days is toward short sales, as they offer an upside to buyers, lenders and real estate agents. But are short sales the best option available to the actual home owner?
Typically, it truly is not in your best interest, although many involved in the process might like you to believe otherwise.
If we take a closer look, we can see the consequences to various actions. The first question is what to do when you realize you can no longer pay your home loan. If you should stop making payments, what will happen?
An immediate consequence is that your credit will be harmed. Your credit is crucial to future lenders who might decide at some later point if you are worthy of making a loan to, which could require you to work with private money in the future. Increasingly, it’s also being used by employers who may be making a decision on whether or not to hire you. Deciding to move forward with an action that can ruin this score is something you really need to consider carefully.
Your credit score is created with old and guarded methods using information that has been compiled over time, encompassing your entire borrowing life. According to the credit bureaus, these scoring systems are meant to give an indicator of how likely you, as a borrower, are to default on a loan during the first two years it is out.
There are a number of companies other than the big three that have their own scoring models, most running numbers between 500 and 900. If you stop making payments, most of the models will lower your score into the 600 range or lower
If your credit is in under 680 based on one of the major credit reporting agencies in today’s market, finding a loan for any reason can be incredibly hard (except, of course, if you are talking about private hard money loans). When sitting down to make your decision on which way to go, doing a short sale of your home will not keep your credit in pristine shape, despite what many in various industries might tell you. So what is the benefit of short selling your home?
The biggest benefit is getting the debt you owe forgiven (be sure to read the fine print), and keeping a foreclosure off your credit report. A short sale will impact your credit score about the same as a foreclosure, but by short selling your home, you will be eligible for another conventional type loan in about 2 years time, rather than 3 or more that a foreclosure will require.
You may want to consider looking into loan modification. This can be a lenghty process to go through, but if you need to stay in your house and save your credit, a loan modification may be a good option to look at.
You will want to do your own due dilligence before you decide what course of action you are going to pursue. Depending on what state you are in, there will be different ramifications for the various options. Seek out an honest real estate agent and/or real estate attorney, make an appointment, and talk about all your options before you make a choice. This is a large financial decision, it is important to get it right!
