Mar 05 2010
How to Decide Between Short Sale and Foreclosure
With a foreclosure on every corner, and many homes “underwater”, what is a homeowner to do in today’s real estate environment?
Home values are down thirty, forty, even fifty percent or more in various locations from their 2006 peak and unemployment in California is above the ten percent mark. Throughout the country, more than thirty percent of individuals who own their homes owe more than their properties are worth. About one in every eight of all mortgages are behind on payments, says the Mortgage Bankers Association.
If you are aproaching the point of defaulting on your loan, there are three basic options: a short sale, loan modification or a foreclosure. The pressure these days is toward short sales, due to the fact that they offer a benefit for real estate agents, lenders and buyers. The question then becomes, is a short sale truly your best option as a consumer?
A lot of the time, a short sale is not really the best solution, even though others working with you during this time of need might like you to believe otherwise.
Let?s look at this in more detail. So you are struggling to make mortgage payments. If you should stop making payments, what will happen?
First, it will really hammer your credit score. Your credit score is needed to show to future lenders who may have to decide at some later point whether they want to lend you money, and could make you seek out private money loans down the road. Also, your credit is also being used by potential landlords and employers. Ruining your credit is not something to rush headlong into.
Your credit score is calculated with secret and proprietary formulas using data collected from your entire credit history. The people in charge of these scoring systems say that they are supposed to be an indicator of how likely someone is to stop paying on a debt or loan during the first two years.
Other companies have their own formulas that do pretty much the same thing. On another popular credit score scale, which runs from 500 to 990, stopping payments on all your loans will drop you into the low 600s.
If you have a credit score of less than 600 in today’s market, obtaining a loan of any kind can be incredibly difficult (unless you are looking at going with private hard money). When sitting down to make your decision on which way to go, short selling your property will not keep your credit in pristine shape, despite what many may want you to believe. So is there really a beneift to going through a short sale?
The main benefit is getting the debt you owe forgiven (be sure to read the fine print), and keeping your credit report foreclosure free. A short sale usually will impact your score about the same as a foreclosure, but with a short sale, you will be able to get another conventional home loan after about two years, rather than 3 or more with a foreclosure.
A better option is to look at loan modification. this can often be a lenghty process to work through, but if you would like to stay in your house and save your credit, a loan modification may be a great option to explore.
You need to be sure to do your own research before deciding on what course of action you are going to pursue. Also remember that different states have different laws and there will be different ramifications for the various options. Find an honest real estate agent and/or real estate lawyer, make an appointment, and go through all your options before you make a decision. When making this decision, make sure you are comfortable with the direction you choose, good luck!
