A couple of days ago I received an email from a reader, who like so many other Americans, is having difficulty paying their monthly mortgage payment. He asked me if I would recommend a short sale or a foreclosure on his property. He said his home is worth significantly less now than we when he originally bought it and his mortgage payments are now 1.5 times more than his family’s monthly income.
There’s a big difference between a short-sale and foreclosure. A short sale is when the home owner and the mortgage lender agree to sell a property for less than the full loan payoff. Meaning, if a homeowner bought a house for $300,000, took a mortgage from a bank for $270,000, and now both the bank and the owner agree to sell the house for $220,000.
Foreclosure is the process whereby the mortgage lender takes possession of the property; the borrower fails to make mortgage payments for a significant amount of time. The borrower is legally kicked out and the bank becomes the homeowner.
Though both have negative results, short sales are the lesser of 2 evils.
A short sale will result in approximately a 200 point drop in your credit score but a foreclosure can be a 300 point hit.
After a foreclosure, a borrower needs to wait 5 years to avail a new mortgage, subject to establishing a new credit score. In the case of a short sale, the waiting period is only 2 years.
As of a year ago, the Obama Administration announced the Making Home Affordable Program (MHA) in order to prevent foreclosures. The program reduces mortgage payments so that the struggling homeowner might stay in their home. If they are still unable to make payments, the homeowner may get up to $1,500 as a relocation expense if he/she opts for a short sale, rather than a foreclosure.
My advice to the reader is to first contact your bank to see if you mortgage rate can be adjusted, under MHA, to a more affordable amount. If you can accomplish this, you’ll be able to stay in your home for years to come without damaging your credit score. Remember, a credit score is important if you want take a loan to buy a car or borrow money to help pay for your kids college tuition.
If making even a reduced mortgage payment isn’t an option I suggest you try to come to terms with your lender for a short sale. Though it won’t do your credit score any good, it will have less lasting effects than foreclosure.
If you are considering a short sale, make sure you consult with a CPA and an attorney, rather than a realtor. Short sales can be complicated and having these professionals advice is important.
I know that you must be stressed and frustrated. Do your best to think with your head when you make these decisions and don’t let emotions overcome you. Try and make the best out of this tough situation and you in the future, you will be that much stronger for it.
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