When you first bought that new house, you believed it would be your home for a long time. You had a plan and worked hard to save money, put down a deposit, and were ready to take on the long term commitment.
Unfortunately, circumstances can happen in life that ends up changing our plans.
If you lose your job, have a medical situation, or some other financial crisis, you could find yourself unable to pay your mortgage. Not only is this very stressful, if the right decision isn’t made, your credit score could take an additional hit.
You have heard the terms short sales and foreclosures, but you aren’t quite sure of the details of either. You need additional information in order to make the right choice for you and your family.
If you are curious on how equity works, here is the ultimate guide.
Here are some answers to your questions on a short sale vs foreclosure.
Before closing on your home, you found a lender for the mortgage. This could have been a traditional bank or a mortgage company. Each month you pay them the agreed-upon mortgage amount.
If you miss a monthly payment, it is known as being in default and you will get a notice. Most lending companies will allow a few months to catch up, but eventually, they will want their money.
If you can’t pay for your home, you will lose it and have to move out. You may not be able to avoid that situation, but if you don’t wait too long, it is possible to save some points on your credit score and move on with a better financial status.
Your options are to either do a short sale or move on to foreclosure. To understand the differences, let’s break down the details.
A short sale is basically selling your home at a loss. You do not walk away with any money, and in fact, you may still owe money to the bank, but it shows good faith and does not have as bad of an impact on your credit score.
If you decide to try a short sale, you must present documentation on why you can no longer pay for the mortgage. You need the approval of the lending company before proceeding with the short sale. In fact, they must be brought all offers made on the house.
Once a sale is made, the money goes directly to the lender. Whatever the difference (or shortage) is, it will still be your responsibility to pay back.
If you wait too long to fix the situation, the lender will take matters into their own hands and begin the foreclosure process. This is involuntary, and once started, the bank finishes the deal.
Foreclosure usually begins when the mortgage is between three to six months late. If you are still in the home at this point, you will be evicted.
The lender becomes the seller of the home and tries to get as much as they can for it to cover any losses.
Each state has its own foreclosure rules. Here is a state by state listing.
Depending on the situation, time may become an issue.
The short sale option can be a lengthy process. There is a lot of paperwork and transactions, and the lender must review all offers before a settlement is arranged.
You must continue to make your mortgage payments while waiting for the short sale to be finalized.
Foreclosure does not take as long because the lender has taken control of the home legally and is in charge of the sale. They want it to happen as quickly as possible to get their money back.
You may be wondering if selling your home to an investor is a good idea. Here are four reasons it could be.
If you are able to keep your mortgage payments current during a short sale, your credit score will not take a big hit. However, keep in mind this does not take into account other financial issues you may be experiencing.
The consequences of foreclosure are much harder on your credit score. It can take a hit from 200 up to 400 points depending on how many missed payments you had before going into foreclosure.
If you are looking to improvement your credit score, here are some tips.
You will not be in this financial crisis forever. Eventually, things will improve, and you will be ready to purchase another home. The length of time you need to wait before getting approved for another loan will also depend on which option you chose.
If you go with a short sale, you can apply for another mortgage in the two to four year range. The more money you are able to put down, the earlier you can try.
A foreclosure stays on your record much longer. You will need to wait seven years before trying again to buy a home. Some lenders will make an exception if you can prove the foreclosure was due to an unexpected job loss.
You should shop around to find the best deal, but always be upfront with all lending companies about your previous financial difficulties. They will find out in their research, so it is best to talk about it from the beginning.
Most people never think they will have to make the decision between short sale vs foreclosure. It is a highly stressful situation when you can no longer make your mortgage payments and need a solution to move forward.
A foreclosure should be the last resort as it has a huge impact on your credit score and delays another home purchase for several years.
A short sale can save your credit score and help get you back on your feet and in a new home sooner.
If you are in over your head and need help with your decision, read on to learn more about how we can help.
Lisa is a local real estate investor in Austin Texas.