Northern California Century 21 M&M Real Estate Agents are asked everyday – ‘I can’t afford my home, should I sell it by short sale, or wait for the bank to foreclose?’
So, in an attempt to answer this question, what follows is – ‘just the facts’.
A short sale occurs when a property is sold and the lender agrees to accept a discounted payoff, meaning the lender will release the lien that is secured to the property upon receipt of less money than is actually owed. Courtesy of About.com
The benefits of a selling a home through short sale are:
- Your home sale will be handled like any other home sale.
- Retain some dignity knowing that you didn’t lose your home to foreclosure
- No mortgage payments to make unless you choose to make them
- If your credit report does not reflect a 60-day+ late pay, under Fannie Mae guidelines you will be able to buy another home immediately.
- Loan applications don’t ask questions about a short sale
The drawbacks of a short sale are:
- Waiting for the bank to respond to an offer is frustrating
- The bank will examine your personal records; tax returns, bank statements, assets and liabilities in addition to asking for a hardship letter from you.
- Accommodating potential buyers will mean keeping your home in ‘ready to show’ condition for weeks or months, putting up with traffic through your home.
- There is no assurance the bank will accept a short sale offer
- The derogatory credit will remain on your credit report for 7 years
- Good credit behavior can supplant bad credit after two years even though the derogatory credit will remain for seven years.
A foreclosure is the legal process by which an owner’s right to a property is terminated, usually due to default. Typically involves a forced sale of the property at public auction, with the proceeds being applied to the mortgage debt. Courtesy of InvestorWords.com
The advantages of losing a home through foreclosure are:
- No mortgage payments to make throughout the process
- The home is still yours until the foreclosure is final
- No strangers are traipsing through your home
- Banks sometimes give cash for keys after the public sale
The drawbacks to foreclosures are:
- The right of home ownership is striped away, former homeowners have to rent a residence
- Memories are made in a home, losing it can shatter future dreams
- The bank may post a Notice of Public Sale on your front door.
- Loan applications require that you answer the question – “Have you ever had a property foreclosed upon or given a deed-in-lieu thereof in the past 7 years.” If you lie, you may be subject to investigation by the FBI for mortgage fraud.
Distressed Homeowners and Credit Scores – Fair Isaac Corp (FICO) released a report that says credit scores are affected about the same, whether a seller does a short sale or a foreclosure. Average points lost on a FICO score are as follows:
- 30 days late: 40-110 points
- 90 days late: 70-135 points
- Foreclosure, short sale or deed-in-lieu: 85-160 points
- Bankruptcy: 130-240 points
So you see, the points can add up pretty fast…add the 30-60 days late pay-points to the foreclosure short sale or deed in lieu of foreclosure and your credit score can easily take a 200-300 point hit. This means that a seller’s FICO score was 680 before foreclosure, it could dip as low as 380.
So there doesn’t seem to be any credit score advantage for a delinquent borrower with regard to a short sale vs foreclosure, at least what is reflected in your FICO score. However, most experts agree that there is a much quicker credit recovery when the home is sold through short sale vs foreclosure.
NOTE: Century 21 M&M Real Estate advises delinquent homeowners to seek legal and tax advice before making the decision of a short sale vs foreclosure.