Homeowner Consequences: Should I short sell or ForecloseAuthor : Farhad Patny
By Farhad Patny, M.S.B.A.Realtor & Loan Officer, Contributor.
If you, a homeowner, have not been making the monthly payments on your mortgage, and, if other options have not worked out, the lender may foreclose on your home after completing all the legal formalities. As a homeowner you can either take this passively and let the home foreclose, or, as more and more homeowners are doing, you may want to take things in your own hands and try and short sale your home. What is a ‘Short Sale’? A short sale is where the home is sold for an amount which is less that the debt owned on it and the lender agrees to accept that lesser amount to release its lien on the property. In a short sale, the lender bank receives a lesser amount from the sale of the home than the amount the homeowner owes the bank, it pays almost all the closing costs and expenses related to the short sale while the seller may not have to pay any monies at all.
In December 2009, over 25% of the homes sold in Maricopa county were short sales. Why are more and more people going for a short sale instead of letting their home foreclose.? A foreclosure can negatively affect your credit for a long time. A foreclosure will remain as a public record permanently and on a person’s credit history for 10 years or more. Credit scores may be lowered anywhere from 250 to more than 300 points. A foreclosure will typically affect a credit score for over 3 years. According to Fannie Mae guidelines you may not be able to get a Fannie Mae backed loan for upto 7 years. A foreclosure could also affect your future loan approval and loan interest rates and terms. Current and future employment, security clearances, etc are other things that might be affected and need to be considered*. (See details in the Box titled “Homeowner consequences). These are some of the reasons a foreclosure is not the best option for most people and why more and more people are opting to contact a Realtor and short sale their home. As a Licensed Real Estate Agent and a Loan Officer, I can definitely help you short sale your home. However, since I am a not a licensed CPA or Attorney, I strongly recommend you talk to these professionals and get their professional advice in the matter.
A short sale is normally a win win situation for all: the seller does not have the mark of foreclosure on his/her credit, the bank gets some or most of its monies back and the community benefits by not having a empty home sitting for months and months. If you have received an Auction Notice on your home and even if the auction date is only days away, give me a call. As a licensed Realtor I may be able to help you out:
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HOMEOWNER CONSEQUENCES
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ISSUE
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FORECLOSURE
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SHORT SALE
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Credit Score
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Score may be lowered anywhere from 250 to more than 300 points. Typically will affect a credit score for over 3 years.
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Only late payments, if any, on mortgage will show up and after sale, mortgage is normally reported as ‘paid as agreed’, paid as negotiated’ or ‘settled’. This can lower your score as little as 50 points if all other payments are being made. A short sale’s effect can be as brief as 12-18 months.
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Credit history
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Foreclosure will remain as public record permanently and on a person’s credit history for 10 years or more.
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A short sale is not reported on a credit history. There is no specific reporting for ‘short sale’. The loan is typically reported ‘paid in full, settled’.
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Fannie Mae Loan-Primary Residence**
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A homeowner who loses a home to foreclosure is ineligible for a Fannie Mae-backed mortgage for a period of 5 years.
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A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed mortgage after only 2 years.
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Fannie Mae Loan-Non Primary**
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A homeowner who allows a property to go to foreclosure is ineligible for a Fannie Mae-backed mortgage for a period of 7 years.
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An investor who successfully negotiates and closes a short sale will be eligible for a Fannie Mae-backed mortgage after only 2 years.
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Future loan with any mortgage company
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On any future application, a prospective borrower will have to answer YES to question C in Section VIII of the standard 1003 form that asks ”Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?” This may affect future rates and approvals.
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There is no similar declaration or question regarding a short sale.
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**Based on Fannie Mae announcement 08-16.
* I am a Licensed Real Estate Agent and a Loan Officer. I am not licensed as a lawyer or a CPA and cannot advise about the legal or tax consequences. I strongly recommend that you obtain legal advice from a competent real estate lawyer or accountant. The information given above is just for your understanding, so that you may be able to discuss this better with your CPA or attorney:
Sources: US Dept. of Treasury and MakingHomeAffordable.gov. Farhad is a Realtor and Loan Officer, specializing in Short Sales and Loan Modifications. Please email your questions to [email protected] or contact Farhad Patny at 623 297 4448.