Is a Short Sale a Good Alternative to Foreclosure
Just how is the average American supposed to make their way through the existing real estate market and foreclosure crisis?
Real estate values are down fifty percent or more in many places from their 2006 peak and unemployment in California is well into the double digits. Across the country, more than thirty percent of individual homeowners owe more than their houses are worth. More than an eigth of all mortgages are behind on their payments or in default on a nationwide level.
If you are in the position of defaulting on your loan, there are three basic options: a loan modification, a foreclosure or a short sale. A lot of the advise you will get these days would point towards the short sales, because they offer an upside to buyers, lenders and real estate agents. But is a short sale really your best option when looking at a potential default?
Typically, a short sale is not really the best solution, even though those involved in the process may lead you to think it is.
If we take a closer look, we can see the consequences to various actions. The first question is what to do when you realize you can no longer pay your home loan. If you should stop making payments, what will happen?
First, it will really hammer your credit score. Your credit is needed to show to future lenders who may have to decide at some later point just how good a risk you are, and may require you to work with private money if you should need a loan. Also, it’s also being used by employers and landlords, to name a few. It’s not a figure to be taken lightly.
Your credit score is calculated through arcane and proprietary methods using data that has been compiled over time, encompassing your entire borrowing life. The people in charge of these scoring systems say that they are supposed to be an indicator of how likely someone is to stop paying on a debt or loan during the first two years.
There are a number of companies other than the big three that have their own scoring models, most running numbers between 500 and 900. If you stop making payments, most of the models will lower your score into the 600 range or lower
If your credit score is below 650 in today’s lending environment, getting a loan of any kind can be terribly difficult (except, of course, if you are talking about private hard money lenders). If obtaining a loan in the near future is a goal of yours, short selling your property will not save your credit, despite what many will have you believe. So are there any benefits to short selling your house instead of walking away?
The biggest benefit is getting the debt you owe forgiven (be sure to read the fine print), and keeping your credit report foreclosure free. A short sale usually will impact your credit about the same as a foreclosure, but by going through the short sale rather than a foreclosure, you will be eligible for another conventional home loan in about two years or so, as opposed to three or more with a foreclosure.
What you may want to consider is looking into loan modifications. this can often be a long process to work through, but if you need to stay in your home and save your credit, a loan modification may be a better avenue to explore.
You have to do your own research before deciding on what direction or option you are going to take. Depending on what state you are in, there will be different ramifications for the various options. Locate a good real estate agent and/or real estate attorney, sit down, and look at all your options before you make a decision. Making this decision is a big deal, and it is important to surround yourselves with professionals who will help you make the best decision possible!
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