Couples facing divorce often have a big decision to make regarding the family home. It is not unusual for either spouse to be able to afford the mortgage payment on their own. With the economic situation, the home may also not be worth what is owed. This forces the couple to make another decision – do they sell the property short, through a short sale, or let the home go back to the bank via foreclosure. Either decision requires carefully deliberation and the right information from an expert.
If the homeowner is participating in the federal government's Home Affordable Foreclosure Alternatives (HAFA) Program, there are definite credit benefits to choosing a short sale over foreclosure. Recent changes to the HAFA Program dictate what the lender can state on the borrower's credit report after a short sale, and lessens the impact on the borrower's credit rating. Credit bureau reporting of HAFA transactions where the deficiency is forgiven is now to be reported as "Paid or closed account/zero balance" or "Account paid in full/a foreclosure was started", as applicable. A short sale is usually reported as "Account paid for less than the full balance", or similar statements which have a negative effect on their FICO scores.
A short sale will obviously have a negative effect on your credit, however short sales by their very nature actually have a lesser effect on credit than foreclosures. For instance, a completed foreclosure means the borrower has, at a very minimum, missed six months of payments (often considerably more). The property has also gone through a completed foreclosure sale. So while a short sale negatively impacts credit, the effect has been shown to be less than a full blown foreclosure which followed months, if not years, of missed payments.
Some people feel there is a much stronger social stigma attached to foreclosure as compared to a short sale. With a short sale, the homeowner is in control of the sale, not the bank. In fact, today cash incentives may be available to homeowners who decide to do a short sale instead of foreclosure. When the consumer wants to obtain a loan to purchase a property in the future, more opportunities will be available to them sooner if they do a short sale. For example, contrary to popular belief, one can be current on their payments and still do a short sale. And if a homeowner is current on their mortgage through a short sale, they can qualify for an FHA loan afterwards without ay waiting periods. The same option is not available following a foreclosure.
Because each homeowner’s situation is different, we always recommend that you consult with a real estate attorney regarding your options and the ramifications. We also recommend that you do not use the same attorney for a short sale consultation and your short sale negotiating. A short sale negotiator is the company that deals directly with your lenders to try and get your short sale approved. We work with a couple of different short sale negotiators. We often have this fee included as part of the closing costs of the entire transaction. This means that if the sale does not go through, the short sale negotiator does not get paid.
Please call either Steve Hill or myself if you have any questions on the short sale process or if you need a referral for a real estate attorney to discuss your options and the solution that best fits your circumstances.
Sandra Brenner | CRS | Managing Broker
Ph: 206.781.1842 | email@example.com
Steve Hill, Realtor
Ph: 206.679.9577 | firstname.lastname@example.org
Windermere Real Estate NW Inc., Seattle WA 98133