Short Sale or Foreclosure which is the best for you

Foreclosure is NOT your only option!

Foreclosure is the legal process initiated by a creditor to repossess the collateral for a loan that is in default.  Simply put, when a person or entity fails to make a mortgage payment, the lender (bank) has the right to start legal proceedings to repossess the collateral (or property) to recoup some or all of their losses.  When this happens, the borrower can face up to 7 years of credit issues.  After 30 days have passed and a borrower fails to make their mortgage payment, they are considered in default.  The lender can initiate the legal process of foreclosure within the court system after the third payment has been missed.  At this point, the borrower has the following options:

• Foreclosure – The lender may or may not seek a deficiency for the amount outstanding on the loan.  This can create substantial credit issues for the borrower including the ability to purchase/rent another property, obtain an automobile loan/lease, or to even obtain credit cards.  Interest rates on future purchases or credit can be substantial.
• Deed in Lieu of Foreclosure – In this process, the borrower can basically give back the property to the lender.  Credit is reported much the same as a foreclosure with virtually the same consequences.
• Loan modification – The lender will consider this option if certain criteria is met.  Based on the borrower’s financial situation and hardship, some lenders may allow this.  Lender’s terms will vary greatly with this option.  Some of the more common terms for loan modifications will extend the loan for up to 40 years, interest rates can increase in different increments, and your payments can actually increase in some instances.
• Reinstatement – This is when the borrower pays all past due payments, late fees, attorneys fees, court costs and numerous other charges that they may incur.  If the owner wishes to retain the property, and has the financial means, this is the best option.
• Short Sale– This is when the owner of the property sells the property for less than what is owned to the bank/lender.  The bank does not own your property, you do.  The bank owns the mortgage that your property is collateral for.  You may be able to sell your property for less than the mortgaged amount at a fair market value and satisfy the loan in most cases without a deficiency.

The Short Sale Choice

A successful short sale means the seller’s lender is willing to accept a discounted payoff to release an existing mortgage. Just because a property is listed with short sale terms does not mean the lender will accept your offer, even if the seller accepts it. That’s because sellers need to qualify for a short sale. If their agent sells very few short sales, that’s a red flag for your buyer.

Be aware that the seller need not be in default—to have stopped making mortgage payments—before a lender will consider a short sale. A lender may consider a short sale if the seller is current but the value has fallen. The seller may be overencumbered, that is, owe more than the home is worth, so a discounted price might bring the price in line with market value, not below it.