Short Sale versus Foreclosure

Short Sale versus Foreclosure

We discuss the foreclosure option for struggling homeowners, as well as the popular alternative: short sales.

With many Americans facing the very real threat of foreclosure, many are looking for ways to avoid it.  One option, and a topic that has garnered a lot of industry interest, is a short sale. Normally reserved for stocks and other finance-related transactions, short sales are becoming an increasingly popular, and common, foreclosure avoidance tactic for homeowners.

Whether you should do a short sale or let the home go to foreclosure depends on several factors. While for some homeowners, it is easier to throw up your hands and let the bank take your home, that might not be the wisest thing to do.

At its best, a short sale can be a win-win for both parties. For the seller, a short sale provides the opportunity to avoid foreclosure and the dreaded implications that a foreclosure brings, in addition to being able to return to home ownership sooner; alternately, the lender receives most of the value of the loan sooner, and avoids incurring additional legal or carrying costs while the foreclosure process plays out, which can sometimes even take years. And, frankly, short sales are great options for savvy buyers - but these buyers need to not only be looking for a bargain, but have the time and skills to negotiate effectively as well.

What are the rules for buying again after a short sale or foreclosure.  In a short sale scenario, if your payments have never fallen behind 30 days late and the lender does not require that you pay back the loan, Fannie Mae guidelines may allow you to buy another home immediately. The wait for an FHA loan is 3 years.  If your payments are in arrears yet a short sale is granted by your lender, you may qualify to buy another home with a Fannie-Mae backed mortgage within two years, regardless of whether the home is your primary residence.

After a foreclosure, you may be eligible to buy another home in 5 years if the home was your primary residence, with certain restrictions. Without restrictions, the wait is 7 years.  If you are an investor and do not occupy the home, the wait to buy with a Fannie Mae insured loan is 7 years.

The decision to do a short sale or foreclosure also affects your credit score.   A short sale is not a derogatory mark on your credit because credit bureaus do not show the word "short sale" on your credit report. It may say "pay as agreed" or "paid as less than agreed," among other categories. Some clients have reported negative FICO Score drops from 50 points to 130 points.  The point drop is typically due to being in default, that is behind on your payments.  In the case of foreclosure, a number of sources have reported FICO score drops from 200 to 400 points. Generally this credit score will remain on your credit report as a public record for 10 years.

In summary, the short sale will typically leave you in a better situation financially.  If you are eligible, it is definitely a path worth considering.

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