No one ever buys a house intending to eventually find themselves on the verge of foreclosure. Unfortunately, sometimes circumstances arise that make such a situation unavoidable. It’s important in those stressful times to remember that you do have an alternate option that may be able to help to make your situation a little brighter. A short sale can offer many advantages over a foreclosure including reduced impact on your credit score, a shorter wait period before applying for another home loan and having more control over your situation, which may just be a valuable psychological boost during an upsetting period.
In a foreclosure, the lender claims ownership of a property when the borrower is behind on or has stopped making payments on that property. Alternately, when pursuing a short sale the borrower asks permission from the lender to sell the house at a price that is less than the amount still owed. For example, asking to sell a home for $155,000 when $175,000 is still owed on the home. In order to gain approval for a short sale, the current homeowner must provide documentation showing that they have fallen under financial hardship that does not allow them to continue making payments (job loss, divorce, etc.). It is also up to the homeowner to provide evidence of comparable property in the area reflecting the lowered asking price on their own home. Once approval has been granted by the lender, the borrower is able to put the home on the market. Any offer that might be accepted must be approved by the lender before an agreement can be finalized, so one could expect a lengthier process in selling the home than that which is typical.
In both a foreclosure and a short sale the current homeowner will lose possession of the house and not walk away with any personal profit from the sale, so what significant advantages could a short sale offer to entice this extra work from the homeowner?
In the case of a foreclosure, the borrower can expect their credit score to drop anywhere from 200 to 400 points and the foreclosure will remain on their credit report for 7 years. During those 7 years, the borrower may not be able to qualify for another home loan, or even any large item loans such as a car loan. Although, if one is able to prove that defaulted payments were a result of a situation beyond their control (once again, job loss, divorce, etc.) they may be able to qualify for a new home loan after a shorter wait.
In contrast, it’s possible that a short sale might only drop the borrower’s credit score by 50 points, assuming that the borrower has not yet defaulted on any payments and remains in good standing throughout the duration of the short sale. A short sale may also allow a person to qualify for a new home loan after only 2-4 years, depending on the circumstances that necessitated the short sale. Missed payments before or during the short sale will further adversely affect future loan prospects and credit scores, up to a 200 point hit to a credit score in more severe situations, though this impact will still typically be less than that of a foreclosure.
For this reason, a short sale is a great option for someone who finds themselves “underwater”, meaning that their house is worth less in the current market than the outstanding balance of their loan. Being “underwater” can make refinancing at a lower monthly payment a challenge, and when a borrower is no longer able to keep up with their current payments it can begin to feel like a tight situation that seems to be leading a person towards foreclosure. Being able to negotiate a short sale before falling behind on payments can be a saving grace for people in these situations, making it possible to take a way out that minimizes damage to their credit and future home owning prospects.
An unquantifiable, yet still valuable, benefit of opting for a short sale over a foreclosure comes in the form of maintaining a feeling of control. No property transaction is without stress, but, in a foreclosure especially, one can feel completely helpless and at the mercy of the lender. Though a short sale may not an optimal outcome, the borrower maintains a little more control of their future and the future of their property. Also, avoiding the stigma of having the “f-word” attached to them can help a person maintain a healthier state of mind as they move past what is surely a painful and stressful experience in their life.
It is important to note that, in both a foreclosure and a short sale, the borrower may not be completely cleared of payment responsibilities once the house is no longer in their possession. Sometimes this realization shocks people, after all, once the house is officially out the former borrower’s hands all profits that have been made, or stand to be, go to the lender. Unfortunately, if the house ends up selling for an amount that is less than what was left of the loan, a lending body can sue the former homeowner for a deficiency judgment in order to recoup the disparity.
It’s possible that after a foreclosure or short sale the lender may choose to waive the remaining debt rather than continuing to pursue that borrower. It is additionally possible to negotiate the severity of a deficiency judgment in a short sale within the terms of the sale. Offering to pay a lower lump sum at closing rather than making payments on the full sum over a period of time may appeal to a lender as a one-time sure thing, rather than risk further payment issues over time. It may be worth inquiring as to the possibility of a deficiency judgment in the course of either a foreclosure or short sale so as to not only be prepared if one should be expected but also to give yourself the ability to negotiate when possible.
It can be easy to give up when faced with what seems like a hopeless situation. When the prospect of a foreclosure looms it may seem the only option available is to throw your hands up and wait for what’s coming. But, as hard as it may be to motivate in such a crushing situation, it’s important to continue exploring your options for ways to at least ease the effects of what awaits. In most situations, a short sale offers what can be thought of as a softened blow in a period of a person’s life when they might be feeling beat down. If you find yourself in an unfortunate situation in which you think a short sale might be able to aid you, give us a call and we can help you examine and explore your options in order to find the one that will end the best for you.
If you still have questions, the Colorado Foreclosure Hotline offers a free consultation and help for people who are behind or struggling to make their mortgage payments. They can help you figure out the right path you need to take to fulfill your home buying dreams. Contact them here.
If you're looking to buy a foreclosure or great deal in Durango, you can check out previous blog posts written on this topic here.