Which is Better: Foreclosure or Short Sale?
If you currently experiencing financial hardship and you can no longer stay in you home, you have one of two options: foreclosure or short sale.
A short sale is what happens when you have to sell you home, but even the proceeds from the sale won’t cover the amount that you owe. Because you can’t fully repay what you owe, the lender has to agree to a short sale first. You also have to prove with documentation that your financial hardship will result in the inability to make your monthly payments. For example, you could provide documentation of job loss.
You will also need to work with your real estate agent to give the lender some sales prices of similar homes in your area. Only if the lender analyzes and approves this amount, will you be able to list your home. The lender will also review each offer before you can accept one officially. If the short sale process is completed before you have made late payments on your mortgage, your credit score can drop as little as 50 points. But if you start the short sale process too late, and late payments have already been made, your credit score can drop around 200 points.
Borrower rates are the lowest when their credit scores are 760 and higher. The more your credit score drops, the higher your rates will get. Getting a new mortgage for a new home purchase after a short sale might only take about 2 years if you can manage to put 20% down. But it can take as long as 4 years to get approved for a new home loan if you only put 10% down. This time period will vary from lender to lender however, so it is best to compare rates and terms with a variety. You will also need to contact your tax advisor to figure out if there are any consequences you will face from the short sale.
A foreclosure is what happens when you are unable to make your monthly mortgage payments due to financial hardship of some kind. This will happen regardless of whether you owe more or less than the home is worth.
Missing a mortgage payment is called defaulting. Your lender will send you a default notice if you are 30 days late (or more) on your mortgage payments. If you do not pay the amount you owe by the date on that default notice, the lender will begin the foreclosure process involving repossessing your home and selling it.
The foreclosure process will change depending on which state you are in, and the amount of time it takes from start to finish will vary as well. Timing estimates by state are listed by the U.S. Department of Housing and Urban Development (also known as HUD).
Your credit score after a foreclosure will drop anywhere between 200 and 400 points. This affects your credit score worse than a short sale because you will accrue late mortgage payments in the foreclosure process. After a foreclosure, getting approved for a new home loan can take up to 7 years. However if the situation was out of your control, like the job loss example, sometimes that period of time will be shorter. Comparing terms from lenders will help you find the one that will offer you a home loan sooner.