To Short Sale Or Not To Short Sale

With a foreclosure on every corner, and many homes “underwater”, what is a homeowner to do in today’s real estate environment?

Residential real estate values have decreased thirty, forty, even fifty percent or more in some places from their highs set a few years ago and unemployment in various places around the country is easily in the double digits. Across the nation, over one third of mortgage holders owe more than their properties are worth. Better than one out of every eight home loans are delinquent in some respect, and there doesn’t seem to be an end in sight.

If you are in the position of defaulting on your loan, you basically have three options: a loan modification, a foreclosure or a short sale. The pressure these days is toward short sales, because they offer a benefit for buyers, lenders and real estate agents. But that then begs the question, is a short sale best for you or for them?

Often times, it really is not the best option to pursue, even though others involved in the process might want you to think it is.

Let?s look at this in more detail. The first question is what to do when you realize you can no longer pay your home loan. If you should stop making payments, what will happen?

Right off the bat, it will damage your credit. Your credit score is a key point to future lenders who might decide at some later point just how good a risk you are, and may force you into working with private money loans if you should need a loan. Also, your credit is also being used by employers and landlords, to name a few. Ruining your credit is not something to rush headlong into.

The score itself is created with old and patented formulas that use information collected from your entire credit history. A spokesman for Fair Issac Corp., which maintains the FICO scoring system, says its purpose is to predict how likely the borrower is to default during the first two years of a loan.

There are a number of companies other than the big three that have their own scoring models, most running numbers between 500 and 900. If you stop making payments, most of the models will lower your score into the 600 range or lower

If you have a credit score of less than 600 in today’s market, finding a loan of any kind can be impossibly hard (unless you are looking at going with private hard money). When sitting down to make your decision on which way to go, a short sale of your property will not keep your credit in pristine shape, contrary to what many in various industries might tell you. So is there really a beneift to going through a short sale?

The largest benefit is getting the debt you owe forgiven (be sure to read the fine print), and keeping a foreclosure off your credit report. A short sale can impact your score about the same as a foreclosure, but with a short sale, you will be allowed to get another conventional type loan after about two years, rather than 3 or more with a foreclosure.

What you may want to consider is looking into loan modifications. Oftentimes, this is a lenghty process to deal with, but if you need to stay in your house and save your credit, a loan modification may be a good option to look at.

You need to be sure to do your own research before deciding on what course of action you are going to pursue. Depending on what state you are in, there will be different ramifications for the various options. Seek out a highly reccomended real estate agent and/or real estate attorney, make an appointment, and discuss all your options before you make a decision. Making this decision is a big deal, and it is important to surround yourselves with professionals who will help you make the best decision possible!