Here’s an article written by a friend of mine. Rather than try to summarize I thought I would just share it in its entirety.
SHORT SALE or FORECLOSURE??
In today’s economic climate many homeowners have had or will have to face the very real possibility of losing their homes due to a variety of reasons stemming from job loss, divorce or medical issues to name a few. To compound this problem, because of dropping home prices, the homeowner won’t have the option of selling their home in the traditional sense because there is not enough equity to pay off their lender and/or pay a Realtor to market their home. If this is you, your lender may be willing to modify your loan by lowering your rate, extending your payoff period, and in some rare cases even lowering the principal owed to bring your payment down to an affordable level. Unfortunately, there are still some that either won’t qualify for loan modification or find that their lender is unwilling to help. Regardless of the reason, if you can’t modify you are left with three main options, foreclosure, deed in lieu, and short sale.
- So what is the difference and which is the better option? In short, foreclosure is when the bank takes possession of your home after you have become significantly delinquent on your mortgage payments.
Deed in Lieu of foreclosure is when the homeowner (borrower) conveys all interest in their home to the lender to satisfy a loan in default and avoid foreclosure proceedings. Lastly we have the short sale. A short sale occurs when you need to sell your home but you owe more than the home is worth. If done correctly, the lender, after concluding you have a “hardship” and reviewing the offer to purchase contract from the new buyer, will agree to accept the “short payment” as payment in full. The short payment amount is usually the highest and best that a buyer will pay for the property as long the lender considers that offer to be near or at market value. Important, be sure to deal with a Realtor that is experienced in the short sale process. Both the deed in lieu and short sales could create potential tax liability so be sure to consult a tax professional.
As a Mortgage Advisor, when most people ask me which of these is the best option, what they are really asking is “how badly will each of these options effect my credit and which option will allow me to purchase another home in the shortest period of time?” Let’s start with foreclosures. Under current home loan guidelines, a foreclosure is the worst possible thing you can have on your credit report, it can even be worse than a chapter 7 bankruptcy!
Under some special circumstances you’re looking at 3 years till you can buy another home but for most people it will be a full 7 years till you can get back into the housing market! No matter how bad things may look today for a person facing foreclosure, most will recover well before 7 years go by. With this in mind I don’t recommend foreclosure if at all avoidable.
The next option is the deed in lieu of foreclosure. With special circumstances you can purchase a home again in as little as 2 years but some will have to wait 4 years. It’s worth looking into the deed in lieu option but I haven’t seen a lot of success with these.
Finally we have the short sale. In my opinion this is the best option and most likely to approved by your lender. Like the deed in lieu you can buy again in as little as 2 years on the conventional loans and 3 years with the FHA loans. This is assuming we can provide documentation that there was a reason or hardship that caused the short sale, not just someone walking away from a bad investment.
To summarize, in the future when a home loan underwriter is looking at your file to decide on whether or not you’re a good risk to loan to, they can and usually will look at things like personal responsibility. Which will look better to them, the person that, when unable to fulfill their contractual obligation to their last lender, just threw up their hands and walked away or the person that did what they could to see that their past lender got back as much money as possible through a short sale?
If you have questions about this article or any other home loan related issues feel free to contact me anytime at 619-278-8562 or by email at firstname.lastname@example.org
John C Fagan
Fairway Independent Mortgage Corporation
Senior Mortgage Advisor