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Date: Jul. 9, 2009
Tags: None
Foreclosure vs. Short Sale.
Why Borrowers should pursue a Short Sale.
If your debt problems result in a foreclosure, your credit may suffer for a long time. If the foreclosure happened during the foreclosure crisis, 2007 to present, you might be able to reestablish your credit sooner than would otherwise be possible. The reason is because so many foreclosures are occurring in this period and for reasons which are not entirely the borrowers fault. For example, many borrowers could have avoided a foreclosure had their original lender provided them a fair loan. Instead many borrowers were duped into low interest rate or interest only loans. After these loans reset, the resulting payments were too high for many borrowers to afford. Rather than modify these loans, many banks chose foreclosure. Because of this, many lenders may be more willing to extend credit with a foreclosure on your record than they would have been in the past. However, your waiting period after foreclosure will likely be much longer than if you have had chosen to short sale your property.
Both a short sale and a foreclosure may result in a deficiency. However, if you have just one loan on your residence, many lenders will forgive the remaining balance and report the debt as settled to the credit agencies after a short sale closing. (Note: pursuant to legislation passed in 2008, the forgiven balance no longer has to be reported as income in most cases so long as the home was used as your primary residence.
If you have two loans securing your property, the second lien holder may release the lien for purposes of the short sale; however, they rarely agree to release the debtor's personal liability for the remaining deficiency.
The impact on your credit score after a short sale is nearly identical to the impact you would realize after a foreclosure.
What is a short sale?
A short sale is a sale of real estate in which the net from the sale falls short of the balance owned on the mortgage. The Bank/Lender or even multiple lien holders agree to sell the property discounted due to economic or financial hardship.The short sale prevents the home from going to foreclosure.
So what is the advantage of a short sale?
Your credit score does not tell the whole story and future creditors will look beyond your credit score in making lending decisions. The fact that you worked with your former lender to mitigate their damages pursuant to a short sale agreement will be looked upon favorably by most lenders. The fact is, lenders will realize a much greater loss after a foreclosure due to foreclosure costs (legal fees), accumulating loan servicing fees, and perhaps most importantly the costs of the holding and reselling the property. After the lender purchases the property at the Public Trustee Sale, the lender must maintain the property and in many cases will incur substantial losses in reselling the property. By working with a real estate agent to short sale your property, you mitigate these damages on behalf of the lender.
Additionally, as a result of FHA lending standards the purchase of a new home is made much easier after a short sale. To obtain an FHA backed mortgage on a new home the minimum waiting period is five years after a foreclosure. The same waiting period is reduced to just two years after a short sale. (As a side note, the minimum waiting period to obtain an FHA backed loan after filing a chapter 7 bankruptcy is also two years).
What should I do if I am late on my house payment?
Contact The Denver Realty Company ASAP! We have a limited time to act on your options. Once a homeowner has been given the "Notice of Election and Demand", we have a limited time to save the property through a loan modification or a short sale. However, a loan modification or a short sale approved contract often slows or stops the foreclosure.
Should I file bankruptcy along with a short sale or loan modification?
There is no simple answer to this question because it is very facts and circumstances dependent. The Denver Realty Company cooperates directly with a bankruptcy law firm that has experienced former foreclosure attorneys on staff who will be able to answer this and any other questions you may have involving bankruptcy law. We also have a relationship with loan modification attorneys to help on your behalf of negotiating with the bank on reducing your loan payment.
We understand that this is an extremely emotional and stressful time. However, The Denver Realty Company and its team can help you, your friends, or your loved ones through this process. Please give us a call. All information is kept confidential.
Michael Mancha
Broker Owner
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