When faced with the possibility of losing one’s home, often times homeowners choose to ignore the issue until it is too late. It is important to understand that there are alternatives to foreclosure which offer a much more positive outcome. One of the best options to avoid foreclosure and get out from under a home is a short sale. Below, we will look at the advantages of a short sale vs. foreclosure and explain how choosing to short sale can save your credit, protect you from a deficiency judgment, and prepare you to own a new home in the near future.
In a short sale, the lender agrees to accept a payment lower than the original loan, once the home is sold. A foreclosure is the termination of ownership resulting from a default in payment. Just from these simple definitions it is made clear why a short sale is the far superior choice for distressed homeowners. A short sale is a business deal made between you and the bank, a foreclosure is repossession due to non-payment. In the case of a full-on foreclosure, the homeowner ends up in terrible debt and the lender pays substantial court costs and fees along with the task of reselling your foreclosed home. These substantial costs and fees and the task of reselling your foreclosed home is why banks are willing to accept a lower pay off through the short sale process. Through the short sale process, both the owner and the lender receive at least some amount of financial relief.
Why is a Foreclosure so Harmful?
Perhaps the most damaging aspect of a foreclosure, other than the debt and credit damage, is the limits imposed on your future chances of owning anything of value, namely a new home. The reason a foreclosure is so damaging to your chances of making large investments later in life is that the mark on your credit history is almost impossible to mask, let alone fully eliminate. A foreclosure’s effect on credit scores is by far the most damning and can show up on credit reports for up to 10 years and prevents you from owning a home for 7 years. With a short sale, it is possible to qualify for another home in as little as 2 years.
How can a Short Sale Protect my Credit History?
Since payments after a short sale agreement are significantly lower than those resulting from a foreclosure, defaulting is not such an impending danger. Payments are now manageable enough for homeowners to make on time which helps offset the 50 points deducted from your credit score for a short sale. In as little as 12 months your score can be back to where it was before the short sale. A foreclosure, on the other hand, will deduct a minimum of 250 points from your credit score for at least 7 years and this mark will remain publicly accessible on your credit for at least 10 years. Credit after a foreclosure is the reason owning a home in the future will be impossible.
How can a Short Sale Protect me from Bankruptcy?
After a sale agreement is made and a short sale processed, the new buyers will have taken in some of the debt that the ex-homeowner would have otherwise been responsible for. In majority of the time, lenders will be satisfied enough not to file a deficiency judgment and the debtor will free and clear from the debt. In a foreclosure, on the other hand, lenders are left unsatisfied, and will continue to go after the ex-homeowner for payments even after the foreclosure. The payments expected of the debtor could quickly lead to a financial situation in which bankruptcy is inevitable. After you file for bankruptcy, your credit history is pretty much irreparable. If you are trying to decide between a short sale and foreclosure, keep the dangers of bankruptcy in mind. After a foreclosure you are not free and clear from your mortgage debt and lenders will still pursue you in an attempt to collect these payments. A short sale is the only reasonable option you have. If you stop foreclosure, you stop bankruptcy.
What are the Advantages of a Short Sale?
A successful short sale agreement allows the debtor to pay back less
than the original mortgage called for, upon the sale of the home. After being approved for the short sale process, homeowner’s mortgage payments are often reduced to something more affordable. These lower payments make defaulting less likely which has a better effect on the debtors credit score and protects him/her from resorting to bankruptcy. The greatest advantage of a short sale is that it allows the debtor to qualify for another home loan in as little as 2 years vs. 7 years or longer with a foreclosure. After a short sale, future prospects can still be optimistic.
A foreclosure can completely ruin credit history not only by definition alone, but also by leading the debtor into financial ruin through bankruptcy. A foreclosure does not appease the lender, who in turn will continue to pursue payments that the debtor cannot make. This results in default and a cycle of debt reflected clearly in the debtors credit score. The damage to the debtors’ credit history will then make it almost impossible to borrow money in the future, which means that owning a car or a home will be a far-fetched dream.
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Short Sale Specialist Network specializes in short sales. We are your Short Sale Specialist Realtor and loan modification and distressed property expert. This article and content is for general informational purposes and may not be accurate. This should not be taken as legal advice, technical or tax advise under any circumstance. Seek legal advise and representation in all legal matters.