Brenda: Many homeowners are in an “upside down” position on their mortgages, owing far more than their home is worth in this market. Many of them have done a successful short sale on their home where their lender has approved the short sale. But in some cases, the owners have just “walked away” and let the bank foreclose on their home. Some of my sellers start out wanting to do a short sale and their lenders either decline or ask for a deficiency judgment. Sometimes the owners believe it is less complicated to just foreclose. Tracy, what advantages do you see in doing a short sale vs. a foreclosure?
Tracy: Short sales are by far the better option than foreclosing on your home because the owner can be eligible for a Fannie Mae-backed mortgage after only two years after the sale and their credit will lower up to 50 points for 12 to 18 months. In a foreclosure, an owner has to wait five years in order to qualify for a Fannie Mae-backed mortgage and their credit score can be lowered 250 to 300 points and will typically affect the credit score for over three years.
Brenda: Those are some major differences! And in a short sale, it’s possible to negotiate with the lender to give up the right to pursue a deficiency judgment if the lender requires this. In a foreclosure, here in Florida, the bank has the right to pursue a deficiency judgment. Plus, a foreclosure will remain public record permanently and on a personal credit history for 10 years whereas a short sale is not reported on a credit history. The loan is typically reported as ‘paid in full, settled.’ So why do sellers sometimes choose to foreclose on their homes rather than do a short sale?
Tracy: I think part of the reason is not knowing the pros and cons of a short sale vs. a foreclosure. To anyone considering either option, I’d recommend contacting a real estate professional. Many of us are Certified Distressed Property Experts and have been through hours of training on how to handle these challenging situations. Experienced Realtors can advise you on how to get the short sale process started and also educate you on some new laws that have just gone into effect.
Brenda: For my sellers who owe more on their homes than what it is worth in this market, I always recommend a loan modification first, if they really want and are able to keep their homes. If a loan modification isn’t possible or isn’t going to help them, I then recommend a short sale. In a properly managed short sale, where the realtor has a lot of experience in such sales, the price of the home should be close to the market value and will almost always be a much higher sales price than a foreclosed home sale. Because a home in foreclosure will most likely result in a much lower sales price, there is a higher possibility for a deficiency judgment against the homeowner.
Tracy: I agree. A short sale is the much better option in the long run for the homeowner. Call a real estate professional to learn more about short selling your home. This is a major business decision and doing all of the research that you can will allow you to feel more comfortable when making a life changing decision.