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When a homeowner is financially distressed and cannot pay their mortgage, their best option is to sell. A traditional listing takes too long. Even if a buyer showed immediate interest, they (and their lender) will request repairs. There is no time to restore the house, no time for negotiations. You need to sell fast and pay off the lender.
Home sellers in these situations often turn to a short sale. It is a better option than facing foreclosure. Let’s compare and discuss the advantages and disadvantages of a short sale.
Why You Should Avoid Foreclosure?
Foreclosure is when the lender takes possession of the mortgaged property because the borrower defaulted on mortgage payments. The lender will then try to sell the house to cover their losses.
The consequences of a voluntary foreclosure include:
- Credit Impact: your credit score plummets as much as 160 points, and “foreclosure” stays on your credit report for up to seven years.
- Housing Issues: it will be several years before you can buy another house, because a foreclosure discredits you with lenders.
- Deficiency Judgement: there is a chance that if the lender sells the house for less than what you owe, you will be ordered to pay the difference.
- Debt Relief Taxes: even if the deficiency is forgiven, the IRS views the canceled debt as taxable income.
What is a Short Sale?
A short sale is when a property owner at risk of default sells their property for less than the amount owed on the mortgage. The lender must approve the sale after being given collective documentation by the seller as to why it’s a good idea.
A short sale is actually a chance for a lender to get more money than if the property were to go to foreclosure auction. Once they receive your package, the short sale process takes more than 30 days to complete. If approved, and a buyer makes a good offer, the lender will issue a short sale approval letter.
Pros of a Short Sale
The advantages of a short sale include:
- Avoiding foreclosure and being released from your mortgage obligation.
- Recovering your credit score sooner.
- Getting financial approval for another house more quickly.
- The lender might pay the closing costs.
Cons of a Short Sale
The disadvantages of a short sale include:
- More parties are involved in negotiations: the lender has a higher stake and must approve a buyer’s offer.
- If there is more than one mortgage or lien against the property, all lienholders are involved in negotiations.
- A buyer’s pre-approval for financing could expire before the lender approves their offer.
- If the property is in bad condition, the buyer’s lender may not approve a loan to purchase.
- A deficiency judgement could still be issued if the lender does not forgive the difference between the sale price and outstanding mortgage balance.
- Your credit score will still take a hit, also as much as 160 points, and a short sale will stay on your credit report for up to seven years.
Short Sale versus Foreclosure: Credit Score
I have said here that both foreclosure and a short sale will hurt your credit score. So which is the lesser evil? The difference is:
- With foreclosure, the entire unpaid loan amount, as of the date of foreclosure, is shown on your report.
- With a short sale, the reported balance is the outstanding loan balance minus the sale amount received.
If the difference between these balances is significant, the negative impact will be less severe with a short sale.
Sell for Cash to an Investor Buyer
You can speed up a short sale by selling to a real estate investor. Investors pay cash for a property “as-is,” be it damaged, neglected, or vacant. They do not require traditional sale warranties, an appraisal or inspection. Forgoing these steps will save you time and headaches.
The investor pays 100% of closing costs and associated sale fees, saving you and the lender money. Furthermore, you and the lender choose the closing date, which can be in 15 days or less. You can offload the source of your financial distress, satisfy your debt, and start over with a new home.