Short Sale vs. Foreclosure: Do the Right Thing

Anyone who watches the evening news knows that in recent years the rate of foreclosures has skyrocketed. Thousands of homeowners are unable to pay their mortgage because of a job loss, illness, or other adverse circumstance, while thousands more are “upside-down,” owing more on the mortgage than the home is worth.

The majority of lenders would prefer to avoid foreclosing on a home and instead negotiate a short sale. A short sale is beneficial to the homeowner as well as the bank; yet, in our experience about 80 percent of homeowners in arrears on their mortgage end up taking the foreclosure route, with detrimental results.

A foreclosure can impact your ability to get employment, increase your insurance rates, hinder your ability to be approved for credit cards and car loans, and make it difficult to purchase another property—or even be approved as a renter—for seven years or more. In a worst case scenario, the bank also could seek a judgment against you for the loss it took on your loan.

A short sale will have a lesser impact on your credit history and get you back in the good graces of Freddie Mac and Fannie Mae faster, generally within 24 months, making it easier to buy a home in the future. Negotiating a short sale with your lender also will give you more time to look for another place to live, making the move from your current home less stressful.

More importantly, negotiating a short sale is the right thing to do. When you first obtained your mortgage, you made a promise to your lender to pay back the money that they let you borrow. Although you may have experienced circumstances beyond your control that impact your ability to repay the loan, that doesn’t mean you should act irresponsibly concerning your obligations.

Imagine that somebody borrowed money from you and something bad happened – they became sick, lost their job, or had some other hardship that made it impossible for them to pay you back. Would you prefer that they stopped returning your calls and simply disappeared, or that they tried to work out an arrangement concerning the loan and at least repay you in part?

The same thinking applies to a mortgage. If you do a short sale, you are working with the bank to reach an amicable agreement that works for both parties. In the long run, this is to your benefit. Right now, one in four homeowners is upside-down, owing more on their mortgage than the home is worth, given the current market. Since prices likely will not rise again in the near future, we may soon be in a situation where up to 25 percent of houses will be sold short. The banking industry will recognize that homeowners were forced to sell short or foreclose, and those homeowners who took the time and effort to work out an arrangement with their lender for a short sale will be regarded more favorably than those who turn their back on the lender and walk away, losing their home in a foreclosure.

In the end, a short sale not only is a smarter option for homeowners, but it’s also the right thing to do. If we can answer any questions or help you negotiate a short sale with your bank, please give us a call.

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