Homeownership is a delight, but if you can’t make the payments it can become a nightmare. When you reach a point where the bank is threatening foreclosure, then you may feel like you’re out of options. On the contrary, there are a few options to avoid or, at least, delay foreclosure.
The most common option to avoid foreclosure is a short sale. A short sale is essentially the sale of a home for less than what it is owed on it. For instance, if you owe $500,000 on the mortgage, you could feasibly use a short sale to sell the home for around $400,000 and assuage the bank or lender. But, is a short sale better than a foreclosure?
Understanding a Short Sale
Just how many of us know what a short sale is and how does it work? Oftentimes homeowners whose mortgage payments are upside-down thought of putting their homes on a short sale, however, a homeowner does not necessarily have to be delinquent in his mortgage dues to put his house on a short sale.
Though payment delinquency could be a factor that’s not the only legitimate reason for putting property in a short sale, you could either be facing divorce, just lost a job, or for medical reasons that would affect your steady income.
But what is a short sale? Let us define it and know how it works? A short sale is a property that sells for less than the balance owed on its mortgage. It happens if the mortgage balance of the property, a house, or even a vacant lot is greater than its market value.
However, there are still a lot of misconceptions regarding the short sale, one of which is that the bank would rather have your property foreclosed than be put in a short sale. The bank would prefer to have it in a short sale than in foreclosure because it would cost them more money with each transaction in foreclosure and rather less in a short sale.
Another common misconception is that it is impossible to get approval for a short sale transaction. But in reality, a short sale has become more streamlined and lenders have become more knowledgeable and are willing to work with homeowners to close these types of transactions.
Also, most people think that a short sale takes a very long time to close, but that’s not always the case. Lenders would do their best to refine the short sale process to close the deal in less time. They would want to sell the property right away because each time that passes is money lost.
People think that buyers are not interested in buying short sale homes. Well, this is quite not true since most buyers nowadays are specifically looking for homes in short sale lists.
Homeowners who put their homes in a short sale will not be able to buy a home in five to seven years. Not really, because it all depends on the lenders. Some people purchased new homes in just 24 months after putting their previous homes in a short sale.
Homeowners cannot afford to pay for real estate agents who will process the short sale. Wrong again, it is the lender and not the homeowner who pays the agent his/her commission. The seller does not have to pay the realtor’s commission.
And what exactly does the realtor/agent has to do with the short sale process? Well, the agent determines the type of the short sale, from Fannie Mae HAFA to regular, non-GSE HAFA, to a traditional short sale, etc.
He/she gathers necessary papers and documents then submits the short sale package to the bank. But sometimes they might get the services of a third party to do this part.
The agent helps the seller price the short sale home. The price should be attractive for prospective home buyers and should be enough to satisfy the bank. Then puts the home in the market and submits all offers received to the seller.
The agent also negotiates for the seller, but sometimes if the seller wishes for the services of a lawyer he may do so but oftentimes the services of a realtor are enough to negotiate with the bank on behalf of the seller.
Lastly, the agent then submits the short sale approval to the seller; usually, sellers want a release of liability and no deficiency to a short sale. But state laws tend to govern the terms in the approval.
One useful tip of advice, the seller should always get legal and tax advice from a lawyer before completing a short sale.
Not Necessary Be the Case Always
Many people think that opting for foreclosure is in their best interest because the bank takes control of the property. It might seem feasible that the bank seizing control of the property means that it’s completely out of the homeowner’s hands.
Unfortunately, that’s not exactly true in every case. There are plenty of instances where you may still be liable for payments even after the foreclosure proceedings have finished. For instance, if the bank decides to auction off your house, then the winner of the auction is under no obligation to pay the total amount still owed on the mortgage.
If they win the auction with a bid of $300,000 but the total still owed to the bank is $400,000, you may still be liable for that additional $100,000.
Why People Don’t Like Short Sales?
Short sales also get a bad rap because people think they won’t be approved for them. The common idea is that banks don’t want to approve short sales because they will naturally lose some money. That being said, banks are often much more willing to avoid foreclosure with the use of a short sale.
Foreclosures are time-consuming processes that often require expensive legal fees to carry out fully. Banks also have no guarantee of making their money back with foreclosure. At the very least, short sales provide them with most of their money back and they provide you with peace of mind.
On top of all this, going into foreclosure can affect other aspects of your life much more harshly. For instance, after foreclosure proceedings have finished, it will be another 7 years before you’ll be able to purchase a home again (in most cases).
A short sale might hurt your credit standing temporarily, but you can feasibly buy a new home almost immediately. Get a real estate expert to review your situation to help determine your best options.
Foreclosures also have long-lasting social stigmas attached to them, and foreclosure can even hurt your chances of progressing in your career depending on your employer. Applying for a new loan is also tough if you have a foreclosure on your record.
Most lenders will not give you a loan if you’ve been foreclosed on within the last 7 years. By contrast, there is no need to disclose a short sale on any future loan applications and lenders generally won’t ask if you had to make a short sale.
All in all, foreclosures are rarely the best option if there is any possibility of a short sale (or even a full sale). Although every situation is different, real estate experts will likely advise you to opt for a short sale instead of a foreclosure if at all possible.
Those real estate experts review all short sale offers presented to them to present each homeowner facing foreclosure with their best possible options.
HAFA Short Sales
Many homeowners are burdened by their heavy mortgages, particularly those who bought their homes just before the bubble burst. Under the Making Homes Affordable act, there has been a heavy focus on purchasing new homes affordable and realistic.
However, less emphasis is made on the alternative options that MHA offers current homeowners. One of the most noteworthy options is the Home Affordable Foreclosure Alternatives Program (HAFA). HAFA is a government-regulated program that works to help homeowners avoid foreclosures.
HAFA short sales are a good way for homeowners to remove the burden of a heavy mortgage and start saving and planning for a different future.
HAFA offers two ways for homeowners to avoid foreclosure. Short sales allow the homeowner to sell their home at less than cost if the lender feels they are not likely to recoup their losses. Typically, short sales require a real estate agent to negotiate with the mortgage lender.
Lenders may be hesitant to provide a short sale if you are currently paid up on your mortgage, or if you have any substantial savings.
A short sale is seen as the last opportunity before foreclosure and many lenders will resist a short sale if there seems to be a chance for the homeowner to continue making mortgage payments, despite the hardships they may endure.
A HAFA short sale may also help with relocation costs or other burdens during selling your home and moving.
Short Sales Versus Foreclosures
There are many advantages of a short sale over a foreclosure. One of the biggest is the time allowed for seasoning, that is: how long until you can buy another home or are offered a realistic interest rate. With a foreclosure, the seasoning period is typically 24 to 72 months.
Waiting for six years, despite your new credit scores, income, and market opportunities is a very long time. Short sales typically have a shorter seasoning period, typically within the 24 months through new loans that may be available within just a couple of months of the short sale.
Both short sales and foreclosures will harm your credit rating. However, that impact can vary greatly from case to case. Because foreclosures come after months of late or no payments, the credit rating will have already taken a hit of approximately 100 points. Both short sales and foreclosures can further impact a credit rating by another 80-160 points.
However, because short sales can occur before a late payment is made, or a long streak of late payments has occurred the credit rating may not suffer as greatly. Furthermore, short sales don’t always have as much of an impact on credit ratings as a foreclosure so the total amount of damage a short sale may do to the credit rating is less than a foreclosure.
Buying a Home After Foreclosure
A foreclosure isn’t that bad as you’ve been expecting. Of course, you are going to be stressed out from spending tons of time dealing with it, as well as hitting your finances. Even though it might change your personal views on the future, it wouldn’t take that long to begin changing your life. Moreover, you have a great opportunity to start out looking for a new home and move in a very short period.
After you overcome the foreclosure and everything, related to it, it’s time to purchase a new house and start over. Here are some important things to be done to make your life easier.
1. Taking a break.
Remember that it’s going to be a very bad idea if you will be purchasing a home right after you did the foreclosure. Even though you might have a good financial situation, it’s worth waiting at least 24 months before taking another mortgage.
The thing is that your credit score is much lower after the process of foreclosure: it can get down on more than 200 points, which can work only if you apply to this fast borrowing service, but not for a home loan. Waiting 2 years is going to work out well, as your score will get stable again so that you will have greater options on the mortgage plan with nice rates.
Credit reports often contain errors and wrong personal information, which can affect your credit or so. To prevent this from happening, check out a credit report if it has some errors. Ask your creditors to correct anything that is mistaken to prevent possible misconceptions.
3. What type of loan do you have?
Each type of mortgage offers different policies and guidelines. To be aware of every detail of it, look through the documentation real quick to make sure you know specific rules and terms. For example, some mortgages won’t allow you to take a loan right after you dealt with foreclosure. Some of the other ones, though, can’t be taken unless it’s over 16 months since you’ve been finished the process of foreclosure.
4. Requirement about down payments.
Some lenders make their customers pay at least 20 percent of the whole amount of money to be lent or even 30. Federally funded companies, though, would be able to allow you to pay through your insurance.
Moreover, there might be some new requirements you should fit in to be approved. Besides you need to have the same employer for more than 2-3 years, you must always get the same amount of paycheck or maybe higher. Because you’ve been stable for all those years, it means the lender can trust your ability to pay down the mortgage.
Besides the option of purchasing a house, here are other things to be done after a foreclosure process. One of them is rent-to-own homes, which is a special program, which is a good alternative as well. Once you pay rent for it, a small part of that money goes to your down payments for the house. After some time, when they’re a certain amount being saved, the person can buy a home, using them.
It seems like not so great idea, however, a bunch of lenders agrees on those terms because they would know their customers have a goal of staying in the house till the very end.
Finally, there is still a stigma against foreclosures that short sales do not carry. While federal regulations mandate seasoning periods and lenders may be hesitant against certain credit ratings or patterns, short sales tend to be less of a black mark and are often easier to negotiate around.