Thursday, February 3, 2011

Short sales vs. foreclosure, what's the best option?

Here is a good article explaining the differences between a short sale and a foreclosure as it affects the seller. For those trying to sell, this is a definite must read.

By Rob Blotske

Many homeowners find themselves in the difficult position of deciding if they should try to modify their loan, short sale their home, or just let it go to foreclosure.

Unfortunately, many — if not most — homeowners find themselves owning a home with no equity. For homeowners who are in the situation of having to sell, or can no longer afford the monthly mortgage payment, it can be scary.

Take comfort in the fact that there are some pretty good options besides foreclosure.

First, let me start with foreclosures. I think everyone knows basically how a foreclosure works. The homeowner cannot make their payment and eventually the bank takes the home back through foreclosure process. The bank then offers the home back on the market, and usually at a reduced price.

Some of the negative implications of a foreclosure are the inability to purchase another home for five years; and it will also have a negative affect on your credit rating when you go to purchase a new home. 

Foreclosure will lower your credit score by approximately 250 points, will remain as a public record on personal credit history for 10 years and can affect current or future employment.

On top of all this, the banks have the right to pursue a deficiency judgment to collect the loan balance, which can mean bankruptcy for some. In most cases, foreclosure is not in your best interest.

If staying in the home is your goal, and you don't care if you're upside-down, then a loan modification may suite your situation.

Home Affordable Modification Program (HAMP) is the governments answer and, if you qualify, may be a much better road to follow. Homeowners can simply call their bank and ask to be considered for this program. If homeowners don't qualify for the HAMP program, then a short sale is by far the best option.

“HAFA,” or Home Affordable Foreclosure Alternative is a new government Short Sale program that works pretty well if you can qualify. HAFA is for principle residence only, the loan must be before Jan. 1 2009, is delinquent, and has a loan balance of less than $729,750 (traditional short sales have no dollar limits). Recent changes no longer require the servicer to verify seller's income, nor determine if debt-to-income ratio (DTI) exceeds 31% of gross income.

A couple of nice features of HAFA are the seller may receive up to $3,000 relocation assistance and the bank cannot pursue a deficiency judgment. The re-listing fees are paid by the bank and there are usually no costs to the seller. 

Either a ‘HAFA' or a traditional short sale is an excellent option if you find yourself in this situation.

A past client of mine said her credit score went down less than 100 points and she can purchase a home again through HUD in two years. Please note, a short sale can be a long tedious process and it is essential that you list your home with a Realtor who has experience getting this type of sale done.

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