If you have found yourself behind on mortgage payments recently, chances are you have been anxiously debating your next step. Do you let the bank take the home back, hand them the keys, and ride off into the sunset, or do you think more creatively and consider other options? Rather than tossing the dice on your financial future, let's explore the difference between a foreclosure and a short sale.
Foreclosure: A foreclosure is the legal term used to describe how a note holder (your bank or lender) goes about stripping you of the title to your home. In the real world the process can take anywhere from a few months to well over six months from start to finish, depending on the type of financing instruments that were used to secure the debt. But losing your home is only the beginning. Once completed, depending on the borrower, a foreclosure can also result in a credit score reduction of 200-300 points. This means you will have a much more difficult time securing credit in the future when you wish to purchase a car, obtain lines of credit, or even get new credit cards. When you do find someone to give you a loan, be prepared to pay much higher interest rates. To top it off, if you are searching for a job, be aware that many employers conduct a credit check on new hires and a poor credit score can be used as a reason to toss your resume.
So if a foreclosure is so bad, what other option can a homeowner consider? Many homeowners use a short sale to avoid a foreclosure.
Short Sale: A short sale, sometimes known as a "pre-foreclosure sale", occurs when a bank agrees to accept less than what is owed on a home in order to avoid a foreclosure. Remember, lenders don't want to own your home. Because of this they will often accept a reasonable loss to avoid the costs and hassle of adding another home to their growing national inventory. Though a short stale will still hurt your credit score, it will be looked upon by future creditors far more favorably than a foreclosure. For instance, Fannie Mae recently adjusted their guidelines to require only a two year waiting period for sellers who used a short sale to purchase a new home. At the same time, they lengthened the waiting period for sellers who have fallen victim to a foreclosure to five years. Why the difference? A short sale is seen as a satisfaction of at least part of the debt, rather than a complete write down. In addition recent federal legislation, in most cases, has removed the burden of a tax liability for the forgiven debt on primary residences.
Without question a short sale is almost always the best option. To explore using a short sale to sell your home, talk to a local agent, preferably one with experience in pre-foreclosure sales, and request a short sale package from your lender as soon as possible.