Understanding the Differences between a Foreclosure and Short Sales
Homeowners who are experiencing difficulties in making their monthly mortgage
payments may have considered simply letting their properties go into foreclosure.
Before considering that avenue, it is important to recognize that there may be
other solutions that can make it possible to avoid the often devastating effects
of foreclosure. Such options can include a short sale. Short sales have become
increasingly common today as a result of the collapse of the housing market. Due
to the fact that homes are not worth as much today as they were in the past few
years, numerous homeowners have been left with few other options than to attempt
to sell their properties for less than what is owed on the mortgage.
In the current real estate market and economy, it is not uncommon to have questions
about the differences between foreclosure and short sales. Selling your home
as a short sale can provide more advantages than if you let it go through foreclosure.
Short sales offer a type of win-win for both you as the homeowner and the bank. The
bank may be able to still obtain a portion of the mortgage from the sale of the
property while you will be able to avoid some of the negative effects associated
with a foreclosure.
If you are considering letting your home go, there are a few reasons for considering
trying to sell your home first. When you try to purchase another home in the future,
you will usually have less difficulty in doing so after a short sale than a foreclosure.
Provided that your payments were never more than 30 days late and your lender does not
require you to pay back the loan, you might be able to purchase another home right away.
If your payments are behind when the sale closes, it is likely that you will not be able
to purchase another home for a period of at least two years.
If you allow your home to go into foreclosure, you will typically need to wait at least
seven years before you are able to purchase another home. Under some restrictions, it
is possible that you might be able to buy a home after five years, but the usual time
frame after a foreclosure is seven years.
Foreclosure and short sales can affect your credit score in different ways. A short sale
will typically not be viewed as negatively as a foreclosure. In addition, a short sale will
not have has much of an impact on your credit score. In most cases, homeowners who sell
their home through a short will have their credit score drop somewhere between 30 and 130
points. The short sale will typically be reported as paid in less than full, paid as agreed
or settled on their credit report. If you are able to manage your payments on time up until
the time of closing, your score might drop by only around 30 or 50 points.
The effects on your credit score by a foreclosure can be much more severe and long lasting.
The point drops resulting from a foreclosure can range between 200 and 400 points. This can
be quite damaging to your credit report, but even more importantly, it can stay on your
credit report for between 7 and 10 years. As a result, your chances of being able to purchase
a home in the future can be impacted for quite some time.
There are also many other effects of foreclosures that you do not have to usually worry about
with a short sale. For example, loan applications usually do not ask about short sales but
they most definitely ask if you have ever had a foreclosure. If you have had a foreclosure in
the past, you chances of being approved for a loan are much lower. In addition, foreclosure
will appear on your credit score but short sales will not show up. A foreclosure will be
clearly detailed on your credit report.
While neither a short sale or a foreclosure is the best option for protecting your credit and
should always be avoided whenever possible, if you find it difficult to keep up with your monthly
mortgage payments, it is important to investigate all options available to you prior to allowing
your home to go into foreclosure. A loan modification is one option that you might consider
pursuing as well; however, if that route doesn't work, a short sale may be the best choice
available.
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