What are the Advantages of a Short Sale Over A Foreclosure?
Nobody ever imagines that their own home might one day face the prospect of foreclosure. However, the real estate crash and economic downturn have made this nightmare a reality for many Americans. Sadly, the foreclosure process is often a long and painful process for those involved.
However, there is another option open to many homeowners. In a short sale transaction, the bank will allow the homeowner to sell the home for less than they owe. The borrower is able to put the home on the market through a lender in the hope that the home sells and the lender recoups the majority of what the homeowner owes.
While whether or not you should choose to do a short sale or let your home go for foreclosure depends on many factors, letting the bank take your home is not always the only option you have. Below is listed a few reasons why you might consider a short sale over a foreclosure.
The benefits of a short sale
In a short sale there are many benefits that you should consider before handing your home over to the bank to deal with, including:
- The fact that you are in total control of the sale instead of the bank
- You will know the people who are buying your home personally
- Avoidance of the social stigma around the mention of the word “foreclosure”
- The sale will be handled like a normal sale and you will be afforded the same respect and dignity common to a normal sale
- If you keep up your payments, a short sale can protect your credit rating
Buying property after a short sale
Under certain guidelines, if you have never fallen short on your payments for more than 30 days then you may well be eligible to purchase another home immediately after the sale. However, you should be aware that finding a lender can be a tricky business for those circumstances. If you have kept up your mortgage repayments, you might qualify for an FHA loan if you meet certain criteria. A portfolio loan is often easier to find as well.
If you have not kept up your repayments but a short sale has been granted by your lender, you might find that you are eligible to purchase a home with a Fannie-May backed mortgage within two years, even if the home in question is not your primary residence. This is considerably shorter than the wait for an FHA loan which is 3 years.
The drawbacks of a foreclosure
Foreclosures are a terrifying prospect for many Americans. The prospect of losing your home to the banks can be a horrible thought for many reasons:
- In a foreclosure the right of home ownership is taken away from you
- Where you were previously an owner you will usually return to the marketas a renter
- You may get a “notice of public sale” sign on your door
- Your credit score will suffer terribly for up to ten years
Buying a property after a foreclosure
While you may still be able to get a mortgage after a foreclosure, you most likely won’t be eligible to buy another home for 5 years, even if the home in question was your primary residence. With no restrictions, the wait is usually 7 years. Finding a company that’s willing to insure your property for a reasonable price will also be a stretch if your previous property has undergone a foreclosure. In some circumstances, homeowners insurance coverage lapses automatically when mortgage payments have not been kept up with. This will mean, even while you are still inhabiting the house undergoing the foreclosure process, your contents will not be covered. If you are an investor and you don’t occupy the home, you will have to wait for 7 years to buy with an insured loan.
Peace of mind
The main reason that experts would recommend a short sale over a foreclosure is peace of mind. Real estate is often complicated due to the nature of the needs of the buyer versus the needs of the seller. This is always a stressful process but the stress is somewhat less intense when the homeowner opts for a short sale over a foreclosure. The poor credit rating, the lengthy legal process and the social stigma can be too much to handle.
Short sales are not without risk and the homeowners credit could still suffer if they are unable to keep up payments. However, In this situation a short sale will have a few options for solutions that will steer the homeowner clear of legal action and the laborious foreclosure process.
Short sales often have much more positive consequences than foreclosures and a sellers financial burden and credit score can be retrieved.
Note: This post is contributed by Em Noel