Lately, there has been a lot of news about foreclosures and short sales. Let’s first define the terms. A foreclosure occurs when a homeowner can no longer make the payments on his or her loan. The lender attempts to recover the balance of their loan by forcing the sale of the house.
Instead of foreclosing on the home, a distressed homeowner may try to negotiate a short sale with their lender who may accept a deal in which the homeowner sells the home for a lower amount than owed, usually less than the mortgage balance. This allows the seller to get out of a home that they can no longer afford while avoiding a lengthy and damaging foreclosure.
Let’s compare the advantages and downfalls for foreclosures and short sales for both buyers and homeowners.
Facts a Homeowner Must Consider
It’s a very confusing time when a distressed homeowner is faced with the reality that they cannot afford their home and/or they owe more on their home than it’s actually worth. This is the time to very carefully consider the longterm effects of these choices and act decisively.
What will the effect of a foreclosure and short sale have on my credit?
The short sale will almost always have a less damaging effect on the homeowner’s credit. If handled correctly, the short sale will not be recorded on the credit report and may negatively effect the homeowner’s credit score by as little as 50 points. In fact, there have been cases were the negative impact is next to nothing. Any negative mark resulting from the short sale will usually stay on the homeowner’s credit report for 2-3 years.
However, a foreclosure will likely devastate a homeowner’s credit, decreasing it by approximately 300 points. This damage will stay on their credit report for 7 years and be a part of the homeowner’s permanent record.
Will the Homeowner be able to obtain a home loan in the future?
A homeowner who has been foreclosed on will have to wait 7 years before they are able to get approved for another home loan.
A homeowner who has opted for a short sale, may be able to qualify for a Fannie Mae backed loan within 2 years if he or she meet all necessary criteria. If the homeowner has maintained good credit otherwise and meet certain eligibility requirements, his or her loan criteria can be even lower.
Will a foreclosure or short sale effect security clearances or security checks?
Certain professions require security clearance, i.e. military personnel, police officers, technology industries, etc. Because a foreclosure stays on the credit report for 7 years and remains on a permanent record, it will almost always negatively effect a worker’s ability to get the necessary clearances for their job. A short sale isn’t recorded on the credit as such and the negative items fall off a credit report after 2-3 years. Therefore, a short sale almost never hinders a security clearance or security check.
Will a foreclosure or short sale effect my current and future employment?
It is a common practice for employers to check credit reports for new hires and periodically check their employees’ credit as a condition for keeping their jobs. Again, since foreclosures are reported on a credit report and remain there as a negative mark for seven years, a worker risks his or her future and current employment. However, since short sales are not recorded on your credit report, a worker has better protection.
What are the risks of a Deficiency Judgment?
A foreclosed homeowner runs the risk of a Deficiency Judgment in which a lender demands payments for money owed. In a short sale a homeowner can negotiate the elimination of a Deficiency Judgment. However in most states, a homeowner who is in foreclosure has forfeited right to eliminate a Deficiency Judgment. Subsequently, the bank has a right to go after the homeowner for a Deficiency Judgment until the deficiency judgment is paid, which could be homeowner’s entire lifetime.
Short sales seem clearly appear more advantageous than a foreclosure but a homeowner must meet these 3 criteria:
- A homeowner has a proven financial hardship or verifiable reason for not being able to repay their loan.
- A homeowner must prove insolvency (not have the cash or assets to pay off the loan).
- A homeowner must prove a monthly shortfall, wherein they owe more money each month in financial obligations than they earn.
If you are a homeowner considering a short sale for your home and you meet these requirements, connect with a Californian Estates agent who will be happy to answer all your questions and walk you through the process.
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