Short Sale or Foreclosure - What’s your best choice?

If you are a seller whose home cannot sell due to the market declining, you may be forced to make some tough choices. Those choices will arise when it becomes a necessity for you to relocate, or when you can no longer afford the payments on the home. Several choices include a short sale, a deed in lieu of foreclosure, or a foreclosure. In the extreme case it could even mean having to file bankruptcy.

• Short Sale 
  
  A short sale means that the mortgage amount is larger than the market value of the home, and you do not have sufficient equity to sell the home, pay the mortgage and the selling costs. If there is insufficient equity, and you do not have the assets to add to the equity to pay off the mortgage and the selling costs, then you are considered to be “upside down”.

• Foreclosure

  Foreclosure means the lender is going to begin proceedings to have your home sold and have you evicted from the property. The lender begins the proceedings according to strict time guidelines, and when the time period ends, which varies by the laws in different states, they will sell your home in foreclosure proceedings, usually on the court house steps, and the eviction process will begin.

  Due to the growing number of foreclosures, lenders have begun to bundle a large number of foreclosed homes and are contracting with outside companies to sell them at auction. A foreclosure is more expensive for the lender and in most cases they prefer the short sale because they may recoup more of their money.

• Deed in Lieu of Foreclosure

  A quick and easy method of solving the “upside down” situation can be to walk away and give the property to the lender. You’ll accomplish that by signing a deed over to them. That’s called a deed in lieu of foreclosure. However, they do not have to accept the deed. If they think there is a chance that you will continue to make payments then it is not to their advantage to accept the deed.

Will Your Lender Negotiate a Short Sale

Many lenders will not negotiate a short sale, therefore, a real estate agent or an attorney can be of assistance to you by contacting the lender’s loss mitigation department to find out if they will. You can’t just decide you’re going to sell your home at a loss by asking for a short sale and expect the lender to agree. If your payments are current, there is very little reason for the lender to consider a short sale. If your payments are behind, then a lender may be more agreeable to negotiate with you. If you have cash assets, the lender may not agree to a short sale unless you agree to take a note promising to agree to pay back the amount the lender is being asked to forgive.

Is Your Credit Affected

Yes, and that is because a foreclosure is a public record and the credit reporting bureaus will utilize all of the public records in computing your score. Additionally a deed is a public record so the credit bureaus will pick that up. A bankruptcy is also a public record and that will be reported

• Foreclosure or Deed-in-Lieu of Foreclosure
  
  Each of these solutions is going to affect your credit, and it could be as much as 280 points.  However, there is the possibility that the hit you take could be shaved by up to 150 points in a Deed in Lieu of Foreclosure if you can get the lender to report the deed as Paid Settlement or Unrated.
   
• Short Sale
  
  A short sale will affect your credit rating much less than a foreclosure. The amount it is affected will vary depending on other items on your credit report. Some have seen as little as a 10 point drop while others have seen amounts in excess of 100 points.

How Long Must You Wait Before Buying Another Home

• Foreclosure

  You may have to wait from 3 to 6 years in the event of a foreclosure. Much will depend on how well you manage your credit during the waiting period. Mortgage companies are able to guide and counsel you on how to improve your credit rating, so it may be a good idea to find a company that will work with you to improve your rating in order to reduce the waiting period.
   

• Deed-in-Lieu of Foreclosure
  
  If you can get the lender to mark the deed as Paid Settlement or as Unrated the wait will be much less.
   
• Short Sale
  
  In the event of a short sale the wait could be from 3 months up to a year, and in some cases longer, depending on the other items on your credit record.  

Hardship Letter

To begin negotiating with a lender, a seller must have the home listed, and have a buyer present an offer. The lender will request a short sale package, which will include a hardship letter. That letter must describe the unfortunate conditions that caused you to not be able to keep the payments up. Those reasons could include the loss of a job, a serious medical condition, or other legitimate reason for not being able to keep up with the payments.

Being a loose spender and having overextended one’s credit may not be considered a hardship by the lender.

Expect Hardball Tactics

The lenders do not want to lose money. They would, of course, rather make a deal with you instead of having the home foreclose because it is more expensive for them to foreclose, and they will receive less money. But that does not make them a pushover. If you do not declare bankruptcy, they can try very hard to get you to sign a note to pay off the deficiency amount over a period of time. If you give into this tactic, then it will cost you a lot of money. Your risk is that they may not back down, and you may be forced to declare bankruptcy in order to not have to pay that deficiency. Their risk is that you may go ahead and file bankruptcy, and they will then be stuck with a home that they do not want to own.

Seek Help Early

As soon as you recognize your problems, seek help immediately. The lender may negotiate a new loan with better terms if approached early enough. Obtain the advice of a tax accountant, and attorney or a real estate agent who is knowledgeable about short sales.