Foreclosure or Short Sale: Things to Consider
With today's struggling economy and ever-present difficulties like illness, unemployment or a divorce, it is a good idea for a homeowner to have an understanding of available options if he or she falls behind on monthly mortgage payments. As a starting premise, foreclosure is the least desirable of all options available and should be avoided, if possible.
Foreclosure ends with the lender taking away a borrower's home. The lender can secure a court judgment against the defaulting homeowner for back payments and any costs and fees associated with the foreclosure, including legal fees, newspaper publication costs, clean-up costs, and insurance. Foreclosure may seem like the easy way out - an opportunity to walk away - but that view is erroneous and short-sighted. The biggest, negative impact is on the homeowner's credit score, as it takes a heavy hit when his or her property enters foreclosure. This is not just a short term impact, either. The negative effects of a bad credit score persist because without a home, place to live, and storage for furniture, possessions, and belongings, a homeowner will likely need available credit to obtain an apartment, storage, and/or housing - credit they no longer have.
A real estate short sale is another option for a homeowner facing financial difficulties and unable to make timely mortgage payments. In this remedy, a homeowner sells his or her house to a buyer for less than what she owes the mortgage lender. The difficulty in a short sale is getting the authorization and approval of the lender to the short sale happening, as the lender must agree to take a loss on what is owed under the mortgage.
Often, the communication process between buyer and seller on the one hand and mortgage lender on the other is mired down and slow, possibly taking as long as 90 days to get authorization to conduct the sale. One statistic reports that fewer than two out of five short sales ever make it successfully to closing.
Industry insiders and financial advisers recommend that homeowners falling behind on mortgage payments and interested in considering the short sale should pursue it as soon as possible. Not only does the communication process with the lender require time, but the further the payments fall behind, the higher the unpaid mortgage balance, and longer the amount of time that elapses, the less likely a lender will be to discuss the short sale, let alone to consider accepting the option.
A homeowner's credit is impaired by a short sale, but to a lesser degree than with foreclosure. It is generally advisable to use an attorney, real estate agent or other professional with experience in short sales, if you are considering this alternative.