Many factors have contributed to the large numbers of families presently losing their homes, but the current recession would be the biggest issue to blame. Thousands of families are facing the devastating choice of either foreclosing on their homes, or attempting a short sale. It is important for those families to learn the risks and benefits of each before making a decision on which to choose.
Foreclosure is when the homeowner defaults on mortgage payments for multiple months, leading the bank or other lien holder to take repossession of the home. This legal process ends when the home is sold at public auction, however, banks can ask for reimbursement for back mortgage payments due, foreclosure fees, and interest .
A short sale is when the mortgage holder realizes that they can no longer keep up with the payments and works with the bank and a buyer to negotiate a sale that is significantly less than what is owed. This is usually done to avoid foreclosure, but is completely determined by the bank’s willingness to consent to it. Repayment of interest may also be expected, but usually with better terms than with a foreclosure.
Foreclosure and short sales affect credit scores in different ways. Foreclosing on a home may bring a credit score down as much as 200-300 points. As a consequence, it will be difficult to obtain new credit for many years to come. It may also take up to 3 years to be eligible to buy a house again.
A short sale reduces the amount of time that it takes to get the credit score back to a respectable place. The score will typically only drop 80-100 points, and buying a new home may be possible in as little as 18 months. The process for a short sale is usually shorter than with a foreclosure and costs less for both parties involved.
Losing a home is a very traumatic event, and should only be considered as a last resort. The homeowner should ask themselves if all other possibilities have been exhausted, such as asking a family member for money, or getting a second or third job. If there is no other way out of the situation, the choice between a foreclosure and a short sale should be discussed. Neither option is spectacular, but when stuck with the difficult decision, a short sale is obviously the better way to go.
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Are Short Sales Really Better Than Foreclosure?
