Short Sale vs. Foreclosure: Which is the Better Option?
With many Americans facing the very real threat of foreclosure, many are looking for ways to avoid it. One option, and a topic that has garnered a lot of industry interest, is a real estate short sale. Short sales are becoming an increasingly popular, and common, foreclosure avoidance tactic for homeowners but what are they and how do they differ from a foreclosure.
Of all available options, foreclosure is the worst
The inevitable result of a foreclosure is the lender taking your house. 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 form of credit. A foreclosure will typically affect your credit score for 3-5 years, and will reduce your score by no less than 250-300 points! Furthermore your credit history in a foreclosure will remain as public record for no less than 10 years! There is no upside to foreclosure. It should be avoided at all costs.
Consider a short sale when foreclosure seems inevitable
A short sale is a popular option for homeowners mired down with financial problems. In this case, you would find a short sale specialist, that is a real estate agent who is well versed in these types of sales to negotiate with your lender and convince them to allow you to sell your home for less than what they are owed; the biggest problem you will face is getting your lender to agree to a short sale and it is imperative that you find an experienced short sale specialist and not just an agent with a CDPE (Certified Distress Property Expert) or some other designation claiming to be a specialist.
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 more difficult it becomes to convince your lender to consider and accept a short sale (however, we have successfully arranged short sales for clients who’s homes were just weeks away from auction).
A short sale is less damaging to a homeowner’s credit score than a traditional foreclosure. Credit bureau reports are limited in how they report and foreclosures are represented as such while short sales are represented as settled accounts.
If you are currently employed, employers have the right and are actively checking the credit regularly of all employees who serve a role in sensitive positions. In many cases a foreclosure is grounds for immediate reassignment or termination. Since a short sale is not reported on a credit report it is not a challenge to employment. In the case of future employment many employers have begun requiring credit checks on all job applicants. In most cases a foreclosure will challenge employment and is one of the most detrimental credit items an applicant can have.
Other factors to consider:
The period for eligibility of a future loan differ greatly between a homeowner who loses a home to foreclosure and a homeowner who successfully negotiates and closes a short sale.
Effective May 21, 2008 the homeowner of a primary residence who loses a home to foreclosure is ineligible for a Fannie Mae backed mortgage for a period of 5 years. With a successfully negotiated and closed short sale a homeowner will be eligible for a Fannie Mae backed mortgage after only 2 years. In a non-primary residence an investor who allows a property to go to foreclosure is ineligible for a Fannie Mae backed investment mortgage for a period of 7 years. In a successfully negotiated and closed short sale an investor will be eligible for a Fannie Mae backed investment after only 2 years.
Eligibility for a future loan with any mortgage company for a homeowner who loses a home to foreclosure will affect their future rates and will require the prospective borrower to answer YES to question C in Section VII of the standard 1003 application that asks “Have you had property foreclosed upon, or given title, or deed in lieu thereof in the last 7 years?” There is no similar question or declaration regarding a short sale.
Short sale have disadvantages too
While a short sale will save you from foreclosure, it will in fact have a negative effect on your credit score, frequently lowering it by as much as 100 points. This can be overcome more quickly than the black mark of a foreclosure, especially if you are able to responsibly manage your other credit accounts. Perhaps equally distressing, the Internal Revenue Service frequently deemed the difference between the mortgage balance and the amount realized from the short sale to be taxable as income despite the fact that the debtor never saw a dime of it. There is new federal legislation called the Mortgage Forgiveness Debt Relief Act 0f 2007 that went into effect on January 1st, 2008 which eliminates this problem for those short selling their primary residence. (this protection was originally set to expire January 1st, 2012 but has been extended every year since.)
Almost any option is better than foreclosure
Simply stated, do everything you can before foreclosure occurs and do it as quickly as possible! Contact a short sale specialist, that is a real estate agent who specializes in short sales before your options become more limited. Again, don’t just get any real estate agent to help you! You need an agent with significant short sale experience and one who is well versed and active in this market. They will know who to talk to, when to talk to them, and how to handle all the paperwork to get your short sale request approved! They will help relieve some of the stress you’re going through and will explain the full range of solutions that are available. If you’re looking for a specialist in Columbus, Ohio please call me today for a confidential consultation.
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Hilliard 43026 Lewis Center 43035 Marysville 43040 43041 New Albany 43054 Pickerington 43147 Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235