Foreclosure or Short Sale?
Many home owners are finding themselves falling behind on their mortgage payments, along with many other financial obligations. Normally, many of these home owners would just try to sell their homes and have the loan paid off. In today's real estate market, this is becoming harder and harder due to falling property values. Once a property owner sees that their home is not worth what they owe on it, some are just walking away from the property and allowing it to deteriorate and eventually the bank forecloses and retains possession. This is an option, but not a very wise option. While some owners may feel that they have no other recourse and until recently many banks were unwilling to "work" with the owners to resolve this situation.
There is an option where the seller relieves themselves of the "upside down" property and the bank recovers the majority of their loan. This option is call a short sale. This is where the property is sold for less than what will satisfy the loan on it. To me, this is a positive alternative to a foreclosure for every party involved. The short sale must be approved by the lender, but it makes a property, that may be otherwise foreclosed on, auctioned and neglected for many months, available to buyers at a reasonable price. Home owners are able to remain in the property until it settles with the new buyers, the bank avoids having to foreclose and incurring massive foreclosure expenses, and the seller avoid the pitfalls of having a foreclosure on their credit.
While there are many details to having a short sale completed, it is the most advantageous for a home owner if they foresee themselves buying another property in the near future. With a foreclosure, the timeframe a person may have to wait until they would be eligible to purchase again is up to 7 years. With a short sale, this time frame could be as little as 2 years. This makes a huge difference!
I have valuable experience in completing short sales as a buyer's agent and as a listing agent. If you think your home is over mortgaged for its current value, feel free to contact me and we can discuss its current market value and your options.
The chart below points out some of the differences between short sales and foreclosures and how they affect the owner.
Resident owner not eligible for a FNMA backed for 5 years
Eligible in 2 years
Investor owner not eligible for a FNMA backed loan for up to 7 years
Eligible in 2 years
On future credit applications one will have to answer YES to the question that asks. “Have you had a property foreclosed upon, or relinquished a “Deed in Lieu”
There are no such questions regarding relinquishment of a property by short sale.
A homeowner’s FICO Score may be lowered anywhere from 250 to 300 points or more. One’s credit score will generally be adversely affected for up to 5 years.
Only late payments on mortgages will appear. After the sale the debt is reported as “paid as agreed”, “paid as negotiated”, or “settled by compromise”, only lowering the score by 50 points or so.
A foreclosure can remain in one’s credit history records for up to 10 years
A short sale is not reported in one’s credit history. It’s shown as a charge-off and its effect might last only 12 to 18 months.
Other than a serious misdemeanor or felony conviction, a foreclosure is a primary issue to obtaining (or keeping) a Security Clearance. If one is a police officer, in the military, in the CIA, FBI or in any position requiring clearance, clearance is revoked and the position may be terminated.
A short sale does not challenge most security clearances in that there has been a bona fide offer and compromise regarding indebtedness.
In other words, the loan was paid as agreed.
Employers are actively checking credit on employees in sensitive positions. In many cases, a foreclosure can be a reason for immediate termination.
A short sale is not reported as a foreclosure on a credit report and is therefore not a challenge to employment.
Many employers are requiring credit check on all new employees and a foreclosure is one of the most detrimental entries one can have.
A short sale is not reported on a credit report and is therefore not a challenge to future employment.
In virtually all cases the bank has the right to pursue a deficiency judgment (and likely will) for the balance remaining owed after the foreclosure.
Our attorney is extremely successful in getting a full satisfaction of all the liens for the homeowners but there are no guarantees. On our documentation, the homeowners can elect not to go through with the short sale in the event the lender does not allow a total and complete satisfaction of the entire debt.
A foreclosed-upon home has to go through the REO auction process. If it doesn’t sell at the auction, a lower price will be accepted, resulting in a higher deficiency and, therefore, even more money owed.
In a properly managed short sale, the home is sold at a price that should be close to market value and in almost all instances will be superior to an REO sale and result in less deficiency.
One may avoid a deficiency judgment, prior to the foreclosure action by filling bankruptcy; however, bankruptcy cannot stop the imposition of federal and state income tax on Debt Relief.
A short sale can avoid income taxation on debt relief relative to the offer and compromise as well as the pursuit of a deficiency judgment.
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