Why Short Sale?
There are many ways to lose a home but signing away ownership in a manner that destroys credit, embarrasses the family and strips an owner of dignity is one of the hardest. For owners who can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy or foreclosure proceedings. One of those options is called a "short sale."
Whether you should do a short sale or let the home go to foreclosure depends on several factors. While for some homeowners, it is to
throw up your hands and let the bank take your home, that might not be the wisest thing to do.
Here are a few advantages for doing a short sale that may not have occurred to you:
- You are in control of the sale, not the bank,
- You may sleep better at night knowing who is buying your home,
- You will spare yourself the social stigma of the "F" word, foreclosure,
- Contrary to popular belief, you can be current on your payments and still effect a short sale,
- Your home sale will be handled like any other home sale.
Short Sale vs. Foreclosure
Affects on Credit after a Short Sale
A short sale may be considered to be a derogatory mark on your credit even though credit bureaus do not show the word "short sale" on your credit report. It may say "paid in full for less than agreed" or "settled for less" among other categories. Some clients have reported negative FICO score drops from 50 points to 130 points. Major point drops are typically due to being in default, meaning you have fallen behind on your payments.
Affects on Credit after a Foreclosure
Credit score could fall 105 points to 160 points after a foreclosure. Generally, a foreclosure will remain on your credit report in the tradelines section for 7 years. Also, if a prospective employer runs a credit check on you, your job application may be denied if you have a foreclosure on your record.
Buying a Home again after a Short Sale
If your payments have never fallen behind 30 days late and the lender does not require that you pay back the loan, Fannie Mae guidelines may allow you to buy another home immediately. Finding a lender who will fund that kind of loan is very difficult. If you are current on your mortgage, you can qualify for an FHA loan immediately as well, but lender requirements can be weird such as you have to move more than 600 miles away. If your payments are in arrears yet a short sale is granted by your lender, you may qualify to buy another home with a Fannie-Mae backed mortgage within two years, regardless of whether the home is your primary residence. The wait for FHA is 3 years.
Buying a Home again after a Foreclosure
With certain restrictions, you may be eligible to buy another home in 5 years if the home was your primary residence. Without restrictions, the wait is 7 years. If you are an investor and do not occupy the home, the wait to buy with a Fannie Mae insured loan is 7 years.
Loan Applications after a Short Sale
Loan applications do not ask questions about a short sale. You may report that you sold your home.
Loan Applications after a Foreclosure
You are required to answer the question: "Have you ever had a property foreclosed upon or given a deed-in-lieu thereof in the past 7 years." If the bank sees you have had a foreclosure, your loan most likely will be denied. If you lie, you may be subject to investigation by the FBI for mortgage fraud.