Financial distress can come in many forms, such as a job demotion, a change in sales commission structure, or even job loss. These things can strain a homeowner and cause them to not make payments or only partial payments. It leaves you in a snowballing financial distress that becomes hard to escape. It leads you to a couple of options that are within some of your control. They are a short sale and a foreclosure. Neither are good options, and they can be a nightmare to tackle alone.
Foreclosure is the legal process of a lender taking control of a house fallen behind on the payments. This process has specific steps that need to occur, including an auction of your property, before a bank takes ownership of it. In a short sale, you ask the bank to allow you to sell the property for less than what the loan is for. This process needs their approval because they will need to forgive that portion of the loan or will look to pursue a deficiency judgment. Let’s sort through the ins and outs of short sales vs foreclosure so you can decide which is best for you.
What Is A Short Sale On A House?
A short sale in real estate is when a homeowner sells their house for less than the loan. People typically think of these because of the Great Recession, but generally, this will be due to financial stress but can have other causes or reasons. Sometimes you may have just put very little down on the home, and something happens like a job relocation, where you haven’t built up enough equity to sell it for more than the loan. This would cause a short sale if you can’t come up with the money to make up for the property sale.
For a realistic example, if you bought your house for $200,000 and only put 3% down, even with you having the property for a year and getting some appreciation, you’ve only seen the value jump to $210,000. Selling costs on that property would be around $20,000. Meaning you’re short just $4,000 to sell and that’s if everything goes perfectly. If you need to sell, you would have to be able to come up with that $4,000 to sell. If you can not, you may sell the house in a short sale. Ultimately, it comes down to dollars and cents for the lender. So for them, they may prefer this over a foreclosure. So let’s read about foreclosure.
What Is Foreclosure?
Foreclosure is the process of a bank taking ownership of a property they have a lien on. Depending on your state, there will be subtle differences in the foreclosure process. This will be because of being a judicial foreclosure state or a nonjudicial foreclosure state. It primarily results in the time it takes to foreclose, but there are a few basic steps before a lender can take back the property they lent on.
The basic idea of the steps are as follows: you miss a few payments (generally at least 3), you are sent notice that you missed payments, and you need to catch up on the payments. If payments aren’t caught up, there is a notice of the sale of the home at an auction. If the house doesn’t sell, the bank takes ownership of the property. Some states still have a right of redemption that you can use at any point during this process. It would be a good idea to check with your state laws regarding the specifics of your foreclosure laws.
The thing to note during this process is all the money the bank is losing during this process. They lose out on the interest they should be collecting, there are additional liens placed on the property for the fees issued by the trustee assigned to manage the foreclosure, and of course, there is also the loss of value of the property the lender will have to navigate, leaving them with a significant cost for going through a foreclosure.
Who Benefits From A Short Sale?
This may actually be a process where everyone benefits. Let’s start with the seller. They win because they don’t have to stretch their already difficult financial situation even thinner. They get to sell a good piece of property while it’s still in good shape and before a foreclosure occurs. The bank benefits because they save a lot of expenses by avoiding the whole foreclosure process. A buyer also wins because they get a good piece of property at a fair price.
Is There A Reason To Consider Foreclosure?
Your credit will be ruined. You’ll still lose money throughout the foreclosure process. And you still lose the house. Even though you may stay in the house a little longer and get a fresh start, the downsides are pretty significant. It’s not something we generally recommend to people. Neither is filing for bankruptcy just to avoid foreclosure.
Also keep in mind that after you have moved out, the sales process of that property doesn’t happen instantly. The property will need some maintenance and is unlikely to attract a buyer with a conventional loan. This means it’s harder to sell as well. There are many other steps you can take before you face the foreclosure process, and the earlier you attack it, the fewer reasons you’d have to consider a foreclosure.
Pros And Cons Of A Short Sale
Pros of going through with a short sale
Keeps the house in good condition. Because you are still living in the house and working through a typical sale of the property, the property is likely to stay in its condition. This also means that any buyer should be prepared to take the property as is.
Can save your credit. Having a foreclosure on your credit history is terrible, and there is no way to tell the real difference between using a short sale and having a foreclosure, including the exact amount of time it will affect your credit history. You can rebuild your credit more quickly. Your concerns will be if there are any other missed or late payments before short-selling the property.
You can re-enter home ownership. Some FHA plans will still allow you to purchase another home as long as you meet a few guidelines about missed payments.
The lender can help you out. Because they are saving money by not going through a foreclosure, depending on your financial situation, some lenders are willing to help you with costs to complete the sale. This includes real estate agent commissions or even moving expenses.
It’s likely to be approved by the bank. Because banks only really care about dollars and cents, they are likely to approve a short sale when compared to facing a foreclosure. Our best advice is to ensure you have an experienced real estate attorney who handles short sales to help you navigate the process. And if you’d like an experienced cash buyer to help you navigate the process, fill out the short form below.
Cons of using a short sale to sell your house
Lose of home and equity. Even if you have built a minimal amount of equity through loan paydown or appreciation, you will lose that. And ultimately, you lose your home.
Requires approval. Because the lender will have to agree to take the loss on the loan, they are involved in the sales process and will have to agree to any sale.
They can be costly for you. Even though you’re saving money by not paying the difference on the loan, you may still have to pay attorney fees.
You may be required to pay taxes or have a deficiency judgment. If the bank forgives your deficiency, you may be required to pay taxes on the difference between the house sold for and the loan amount. The bank could also apply a deficiency judgment to you for which you would be responsible. This could allow them to garnish wages, levy bank accounts, or even take non-exempt assets.
If you still think the pros of a short sale outweigh the cons and want to get started on a short sale of your home or you just want to ask questions from a company like SILT Real Estate and Investments, LLC, who has helped sellers with short sales before, just fill out the short form just to the right and we’ll get in contact with you ASAP.
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Pros And Cons Of Foreclosure
Pros of having your house foreclosed
You can try to renegotiate new loan terms. Most lenders would prefer to renegotiate loan terms and keep the loan going instead of having to foreclose on the loan. A bank having foreclosure on their ledger reduces lending capital and costs them more money. Generally, a bank won’t renegotiate loan terms unless a foreclosure occurs.
You can save money by allowing the lender to foreclose. It seems like an oxymoron, but once the bank has started foreclosure, you can save that money for your next residence. It is improbable that you’ll be able to buy a house, so setting the money you would have made for a payment to the side for an apartment may be the most significant advantage to allowing a bank to foreclose on your house.
You get a fresh start. There was probably some problem that caused you to go into foreclosure in the first place. Once the foreclosure process has run its course, you’re unlikely to continue having that issue. With that issue removed, you can now take a long look at your current situation and give yourself the fresh start you may need.
Your home gets a new life. I’m sure that it really won’t matter to you, but to see your home go to a new owner who may love it like you did and won’t let it become a dilapidated home, will certainly help the mom and in turn, the community.
Cons of allowing your house to be foreclosed on
Your credit is ruined. We can tell you exactly how much your credit will be damaged or your score will drop. However, your credit will see a significant negative impact. You are unlikely to be able to buy a home or get a reasonable rate on any more significant, loan-based purchase.
You can still lose money. Just like with a short sale, because the bank is out of the money you pledged to pay back, you may have a deficiency judgment. This means that you still owe that money to the bank, and after adding in all the fees and interest, this can leave you owing well over your initial debt.
You lose all equity you had in the house. When there is any equity, and you attempt to have a short sale, that equity can be applied to all the fees and costs. With a foreclosure, the bank takes back the property without addressing any of the equity. So when you allow foreclosure to happen, even if you have little equity, you lose all of it.
Tips For Buying a Short Sale
If you think you want to buy a short sale, there are some things you should walk into it knowing. These tips will help you ensure a quick and smooth sales process.
Make sure you do a quality inspection and have estimates for repairs.
Most short sale homes are sold as is and is negotiated by the lender. You may lose your contract if you ask for repairs, so it’s best to know what the needed repairs are and the costs so that you can adjust your price accordingly.
Have a realistic offer for a short sale home.
Lenders are still in the money-making business. Submitting a lowball offer without knowing how or why it’s realistically at that value wastes your time and the lenders’. We’ll cover a couple of ways to help with this, just a little lower.
Use as much cash as possible for purchasing that short sale house.
The old adage that cash is king should really be trumpeted here. If providing a cash offer, the lender is likely to look at it favorably because it quickly fixes the problem they have and it ensures a sale. If you can’t purchase with all cash, make sure you put down the largest down payment possibly to help ease any concerns with a financing contingency.
Have no contingencies.
By getting rid of the contingencies, the bank knows you are more likely to negotiate in good faith and ultimately take the property off their hands.
Offer to pay seller short sale closing costs.
By helping the lender ease some of their financial burden, they are likely to look more favorably on your offer. They may even do less negotiating or allow some contingencies if you’re able and willing to pay closing costs.
Frequently Asked Questions About Selling a Home Short Sale
Because of the lien on the property, selling a home on short sale will require a third party to approve. Knowing the answers to these frequently asked questions before decciding to short sale your home may help you be ready for third party approval, which will allow you to sell the property faster.
Are there any other options other than a short sale of my house?
Let’s first address the fact that you don’t have to sell your property. You could keep it and just rent it out. That would be the easiest way to avoid worrying about making the payments. If, for some reason, you can’t rent it, then you can look to refinance into a lower payment, perform a loan modification, ask for forbearance, or even ask to do a deed in lieu of foreclosure.
Options like refinancing and loan modifications may allow for the biggest changes when changing the payment amount. Forbearance will only delay payments and will be reinstated after the forbearance period. Finally, in a deed in lieu of foreclosure, you assign all rights to the property to the lender instead of having a foreclosure occur.
Can either side back out once an agreed short sale is signed?
Buyers can still have the standard contingencies seen in regular transactions, such as inspection, financing, and appraisal contingencies. That’s in addition to a short sale addendum that will allow for additional time for the lender to approve the transaction. During this time, a buyer can walk away from the deal.
Sellers walking away from a deal are rare but can happen when the bank hasn’t approved the sale and a higher offer comes in. While rare, the seller can flat out change their mind as well.
Can a lender stop a short sale of real estate?
In short, yes, they can. The vital question to ask, though, is why they would. We know it saves them money, so why would a lender deny a short sale. Here are a few reasons why.
The seller has enough funds to cover the difference. No lender would be willing to take a loss on a loan when the borrower has the money to cover the loss. It seems like common sense.
There is no hardship and need to sell. If there is difficulty in making the payment but can be done with a little financial restructuring, they will likely not approve a short sale. For example, if you’re in sales and you had a lousy couple of quarters vs losing your job and having medical expenses after selling your car to get rid of that loan, your bank is more likely to help the person in a worse financial situation.
There are too many liens on your property. If you have more than one lien on your property, the proceeds on the short sale may only cover some of the liens filed.
You have an inexperienced short sale attorney. You will likely want an attorney to represent you during this process. If the attorney you choose to represent you hasn’t completed a short sale before, they may not know how to frame your hardship or address your financial status well enough for the lender or all other lien holders.
Frequently Asked Questions About Foreclosure
Knowing everything about foreclosure is extremely difficult, especially if you have never dealth with it. Here’s a few questions that have been asked when others are dealing with foreclosure. This may answer some of the confusing questions you may not know when having a foreclosure on your property.
How will a foreclosure hurt my credit?
It will hurt it most during the months and years immediately after the foreclosure with less effects on it afterward. For example, after six years, you will see less of an effect on your credit score than two months after you had your house foreclosed on.
Do you get any money if your house is foreclosed?
It is a common misconception that you will receive nothing if your house is foreclosed. If there is a surplus after the lender has paid all outstanding debts after the sale of your house, you will receive the surplus. However, this rarely occurs.
How long is the foreclosure process?
This can vary depending on your state, but it can range from 6 months to years for a foreclosure to be completed. This will likely depend on whether your state is a judicial foreclosure state.
Can I keep my house while in foreclosure?
The only way to keep your house is to stop the foreclosure. There are a few ways to stop the foreclosure and keep your house, but most will require you to find the funds to stop it. When you’re considering a short sale, one of the best ways to stop foreclosure that you may want to consider is to contact the lender and ask them for a loan modification.
Final Thoughts of Short Sale vs Foreclosure
Short sales and foreclosures can be complicated processes that can leave you stressed. No one wants to lose their home, but if these are the only options, compare the processes along with the pros and cons to help you determine the right option for you and your situation. They both will negatively impact your credit, but a short sale is far less, and if you’re looking to buy a home any time soon, that may be something you should consider.
If you have questions or think you need to sell your property to avoid a foreclosure or want a company like SILT Real Estate and Investments, LLC to help you try to sell your house short sale, fill out the form below or call us at (708) 415-3801. We’ll give you a fair offer to close as soon as possible to help stop foreclosure before any more fees or interest, and we’ll cover the closing costs.