Short Sales & Foreclosures
In today’s real estate market we are seeing a significant amount of short sales and bank-owned properties listed. How does one know whether they should attempt a short sale or simply foreclose? Here is some information about the process of a short sale and how a short sale vs. a foreclosure affects your credit.
Short Sales
The term ‘short sale’ is a bit misleading because they aren’t always short. In a short sale, everything depends on the loan company. The first step to starting a short sale is to contact a real estate agent. In my personal opinion, I would choose a realtor with at least 10 years experience to ensure they are knowledgable and will be able to handle a short sale.
The real estate agent will then determine a value for the home that is below market value so that the house will hopefully be sold quickly. This value is going to be less than the amount owed on the loan so when an offer is made, that offer is then sent to the loan company with a packet. Then the loan company decides whether they will accept it or not. If there are two mortgages on the home, a short sale can be more difficult because the second mortgage company may not get any money, therefore they may not agree to any terms. But, you do not have to be delinquent on payments to have a short sale approved.
Often times, the loan company will absorb a lot of time deciding on whether to accept an offer, sometimes up to three months. This means the buyer needs to be committed and really want the property. If the offer is accepted and escrow is completed you will be relieved of your debt in most cases and about 100 points will be deducted from your credit score.
Foreclosures
A foreclosure happens when a homeowner defaults on their mortgage. The loan company sends a letter of default and notifys the occupants that the house will enter into foreclosure. A house can still be up for a short sale during the foreclosure process and if the bank accepts the offer foreclosure will be stopped.
Foreclosure damages a credit score by about 250 points. Foreclosure is absolutely something a homeowner wants to avoid if they intend to use their credit in the next 5-7 years.