SHORT SALE OR FORECLOSURE?
Regardless of whether you are in foreclosure and/or if you owe more on your mortgage than your home is worth and you cannot wait for the property value to rise, a short sale may be the best way to get out of your loan. For many years, there were few reasons to sell on a short sale, but times have changed.
Why Agents Recommend Short Sales
You’ll hear that short sales protect credit. That can be only partially true. Your credit will suffer if you fall behind on your payments.
There is one exception. If you have no 60-day-plus late pays on your credit report, Fannie Mae may still offer you a loan to buy another home. However, most people who sell on a short sale are in default past 60 days, so this exception does not apply to them.
A short sale could ruin your credit rating. It might not happen right away, but sooner or later, unless the bank has specifically agreed not to report the shortage, the bank may report it as a Score Factor Code 22. That score factor relates to delinquencies, derogatory records, and collections.
So, let’s summarize for you:
Benefits of Short Sale
- Retain some dignity in knowing that you sold your home.
- You won’t suffer the social stigma of foreclosure.
- No mortgage payments to make, unless you choose to make them.
- You can meet the new owners.
- You will be eligible, under Fannie Mae guidelines, to buy another home in 2 years instead of 5 to 7 years.
- Lenders may be slightly more likely to loan mortgage money in the future because a short sale at least shows that you were proactive in trying to pay off the majority of your debt instead of simply giving up.
- If your credit report does not reflect a 60-day+ late pay, under Fannie Mae guidelines, you will be eligible to buy another home immediately.
Drawbacks to a Short Sale
You may experience some of the same drawbacks as a foreclosure, but they will be less intense.
- Waiting for the bank to respond to an offer can be frustrating.
- The bank will want to examine personal records such as tax returns, bank accounts, assets and liabilities, in addition to asking for a hardship letter from you.
- Accommodating buyers will mean keeping your home in show-ready condition for weeks or months until an offer is received.
- There is no assurance the bank will accept a short sale offer once it’s received.
- If it’s placed there, the derogatory credit will remain on your credit report for 7 years.
For many sellers, though, the chance to buy another home in two years is the real motivation to do a short sale. Good credit behavior can supplant bad credit after two years, even though the derogatory will remain.
Benefits of Foreclosure
Although going through foreclosure is often painful and embarrassing for sellers, there are benefits:
- No mortgage payments to make.
- Foreclosure proceedings take months to conclude.
- The home is still yours until the foreclosure is final.
- No strangers are viewing your home.
- Banks sometimes give “cash for keys” after the public sale.
Drawbacks to Foreclosure
Few people, apart from the sellers who choose to “buy and bail”, really want to experience a foreclosure. Memories are made in a home, and losing it can shatter future dreams. Here are other drawbacks to foreclosure:
- The right of home ownership is stripped away.
- Homeowners return to the rental market as a renter.
- The bank may post a Notice of Public Sale on your front door.
- Your credit takes a nose dive, and a foreclosure will remain on your credit report for 10 years.
- The process can drag on for years with lots of unknowns.
Under Fannie Mae guidelines, without extenuating circumstances, you will not be eligible to buy another home for 7 years.