For some people, an alternative to a foreclosure is to do a short sale, which is when you sell your house for less than what you owe on the mortgage, providing your lender agrees. There are several other benefits of doing a short sale, including:
- Instead of the lender being in charge of selling your home, you are.
- You will know who is buying your home.
- You won't have to deal with the financial or social stigma of going through a foreclosure.
- You can do a short sale even if you're behind on your mortgage payments.
- Short sales are handled just like regular home sales.
Aside from those benefits, there are other differences between short sales and foreclosures, like the length of time before you can buy another house, and how badly your credit report may be affected.
Buying Another Property
After a short sale, as long as your mortgage payments were never more than thirty days late and as long as your lender doesn't require you to repay the balance of your loan, Fannie Mae guidelines say that you will be able to purchase another home immediately, though you may have trouble finding a lender who will fund it. You'll also be able to qualify for an FHA loan immediately if your mortgage is current, though you may have to move more than 600 miles away in order to do so.
If your mortgage was in arrears at the time your short sale is approved by your lender, Fannie Mae will make you wait two years before you can purchase another home, even if the home you sold was your primary residence. FHA, on the other hand, requires a three year wait.
When you apply for a new loan after a short sale, you only have to put that you sold your home on the application.
With a foreclosure, however, the guidelines are different. If the house that went into foreclosure was your primary residence, you might be able to buy another home in five years (with some restrictions), otherwise, the waiting period will be seven years. If the home that went into foreclosure was an investment property or second home, the wait will be seven years.
This is, of course, assuming that you need a mortgage. In order to buy a home outright (if only we ALL had that kind of cash) there is no waiting period.
Foreclosures must be listed on new loan applications. To omit them is illegal, and will generally result in a rejected application.
How Credit Scores Are Affected
Generally speaking, a short sale, while still considered to be a derogatory mark on your credit report, is less of a detriment than a foreclosure. Most credit reporting bureaus don't print "short sale" on your report, but instead make the note "settled for less" or "paid for less than agreed." Depending on whether or not you were in default on your loan at the time you completed your sale, the average drop in FICO score is between 50 and 130 points.
Some lenders report short sales as "charge offs" or "paid charge offs" which means if you apply for any new credit, you'll have to provide proof of the short sale.
Foreclosures, on the other hand, not only remain on your credit report for seven years, but also generally result in a credit score drop of 105 to 160 points. As well, a foreclosure on your credit report could cause employers to consider you a bad risk when you apply for a job.
How Soon Must You Move
If you're doing a short sale, you can negotiate your move-out time with the buyer. This is especially true if you're selling to a house-flipper and not an individual.
If your house goes into foreclosure, the bank has the right to evict you immediately, though you may be able to get a "stay" - or a hold - on that eviction, by opening negotiations to bring your loan current, or to suggest a short sale.
There are several other issues associated with both foreclosures and short sales, like deficiency judgements and whether you'll be taxed on perceived income, that you should discuss with an accountant before completing either procedure. If you have the option to choose, however, a short sale is usually preferable to a foreclosure.