Things to Consider If You Are Thinking Of A Short Sale
If you are facing the possibility of foreclosure you may have heard that a short sale would be better for you in the long run. In some cases that is true. However, in some cases it is exactly the opposite.
Here is a look at why a real estate agent may be telling you that a short sale is the best idea, and a look at the risk.
Why Agents Recommend Short Sales
You’ll hear the myth over and over: “Short sales protect credit.” That’s only partially true. Your credit will tank if you fall behind on your payments. Experts say agents who repeat that mantra without clarification do so out of ignorance or self interest, take your pick.
There is one exception. If you have no 60-day-plus late pays on your credit report, Fannie Mae may still offer you a loan to buy another home. However, most people who sell on a short sale are in default past 60 days, so this exception does not apply to them.
A short sale could ruin your credit rating. It might not happen right away, but sooner or later, unless the bank has specifically agreed not to report the shortage, the bank may report it as a Score Factor Code 22.
That score factor relates to delinquencies, derogatory records and collections. HAFA short sales for 2013 and later offer another option for sellers who are current.
Real estate agents should not give legal advice to clients facing foreclosure nor assure sellers that their credit rating will not suffer adverse affects. Those who insist on this practice may find themselves facing a process server down the road and be praying that their errors and omissions insurance will cover them.
Here are the main reasons why agents encourage sellers to do a short sale:
Agents get paid from the proceeds of sale to do a short sale.
Agents don’t get paid if the seller loses the home to the bank by going all the way through foreclosure.
Even if the home never sells on a short sale, the agent gets free publicity (and new business) through signage, open houses, marketing and posting listings online. – via About.com Home
Two Reasons That A Short Sale Could Be A Good Idea
If you are prepared to accept the remaining debt on your home after the short sale is completed and are able to pay the lender the deficit from the sale, then a short sale may be a good option for you.
Here are two ways in which a short sale can be a good idea.
It can protect your credit.
From a lender’s perspective, it’s better to recover a portion of a mortgage loan than to absorb a total loss. Therefore, in lieu of a foreclosure, banks will often settle for a short sale. This allows both the lender and the homeowner to end up in a better position.
One concern for many homeowners, however, is whether the bank will sue for a deficiency judgment after foreclosure. In an attempt to recover the difference in the amount that was paid and the amount of the loan, the bank can file a lawsuit against the homeowner. A deficiency judgment will appear on a homeowner’s credit report and have a negative impact, just as a foreclosure would [source: Experian].
But rather than endure a costly and possibly lengthy litigation process, a bank will often cut its losses with homeowners who are unable to pay their mortgages due to a proven hardship, such as a divorce or loss of income. And the reduced amount of money owed will ease the burden on the homeowners and not irreparably damage their credit.
It can prevent a foreclosure.
A foreclosure on a home adversely affects the homeowner in a number of ways, and it also has a negative effect on the lender and the housing market in general. The homeowner receives a mark on his or her credit that can make it difficult — sometimes impossible — to borrow money for another home, car or major purchase. This can essentially remove the former homeowner from the pool of large-purchase consumers, a key part of the nation’s economic engine, for years. Banks nearly always lose money on foreclosures; between the lower sale price they receive at auction and the resources they must assign to administer the foreclosure process, it’s rare for them to come out ahead at the end of a foreclosure [source: Experian].
The housing market also suffers from foreclosure, due to decreased home values. A 2010 report by the Federal Reserve Bank of Cleveland estimated that a foreclosed home not only dropped in value, but caused homes within a 260-foot radius to lose up to 1 percent of their value, as well [source: Hartley]. Foreclosed homes are less likely to be maintained and more likely to remain on the market for an excessive period of time, and they make it difficult for homeowners with good credit to upgrade into more expensive homes.
Therefore, if a foreclosure can be avoided, it’s in the best interest of everyone involved. – via HowStuffWorks
Do you think a short sale or foreclosure is a better idea for you?