If your house is about to go into a foreclosure, you are facing quite a tribulation. Not only will you be losing your home, but you will also be losing your credit and suffering from the loss of dignity which comes with a foreclosure.
Many people facing a foreclosure are desperate to find a way out. One possible alternative is what is known as a “short sale.” Is a short sale better or worse than a foreclosure? That depends wholly on you and your personal situation.
A short sale is a transaction in which your lender is agreeing to accept less for the house than what the house is worth.
A short sale isn’t always an option; it is something you have to apply for with your lender, who may or may not grant you the option.
So what are the benefits and drawbacks of doing a short sale? On one hand it does protect your credit—a bit. Sometimes a bank will choose not to report your situation to the credit bureaus, but generally speaking they probably will, and if you are behind on payments, you will be reported as delinquent.
Your credit may not be dinged as severely as it would by a foreclosure, but it will still take a major hit. Agents will try to persuade you that your credit will be safe, but that’s not necessarily true.
They get money for your short sale but not for your foreclosure. So approach the credit aspect of the process with prudence.
One of the main benefits of a short sale is that you don’t need to make mortgage payments, unless you choose to. Again this could impact your credit, so check with your lender before you decide how you want to do this.
You also may be eligible under Fannie Mae guidelines to purchase another home immediately, as long as your credit report doesn’t reflect that you are 60 days behind on any payment. Your dignity may also be protected. A lot of people look down on foreclosures more than they do on short sales.
Do I get A Payoff?
Usually there is also a payoff, especially if you are offered a “cash for keys” style option to get out of the house early. The payoff is pretty small, relatively speaking, but for some it may be useful. You could still owe the money you’re delinquent on after the short sale is over, and the lender will continue collections against you. The “cash for keys” option also applies to foreclosure scenarios.
So what’s the main point of doing a short sale? If you can manage to conduct a short sale properly and not fall 60 days or more behind on your payments at any point, you could qualify under Fannie Mae guidelines to purchase a new home immediately.
Even if you’re more than 60 days late, you can buy one in 2 years instead of 7. This doesn’t apply to you if you’re too broke to pay another mortgage, but it could be extremely useful if you can’t afford your current home, but could afford another one with a lower mortgage. That is the main reason that most people do short sales.
If that describes you, you should check into it! You’ll need to request a short sale from your lender and send a hardship letter to get started.