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Difference Between Short Sale and Foreclosure
Homeowners typically buy a house by taking a mortgage for which the house functions as a collateral. The homeowner is likely to make timely mortgage payments, failing which, the house is seized through the lending institution. The real estate marketplace crashed in 2007 and resulted in a number of people defaulting on mortgage payments. The reason for defaults could be attributed to the truth that the borrowers were sub prime and their only chance of repaying the borrowed amount hinged on the ability to refinance the home at a lower rate of interest. Another possibility was selling off the house in an upmarket and thus encashing the built up home equity. This hope was thwarted since the home owners were not able to sell off the house for a profit due to the housing market accident. Rising interest rates as well as declining home prices resulted in defaults. In fact, many borrowers were not able to pay the taxes imposed through the Federal and the State and became an easy target for tax lien foreclosures.
Short sales, in the context of property, refers to selling off a home at a price which is insufficient to meet the mortgage payments still owed on the house. In this case, lenders may be willing to accept the proceeds from the short sale as settlement your money can buy due and forgive the residual amount that cannot end up being requited. The reason why a lender may be willing to accept less payment, than what is actually due, is to avoid extended and costly foreclosure procedures.
Foreclosure Vs. Short Sales
Given that the government is providing assistance to homeowners to prevent a foreclosure, short sales seems just like a better option. According to Fair Isaac corporation, both foreclosures and short sales possess the same level of negative impact on credit scores. They result in credit ratings declining by 200 to 300 points. However, significant differences exist between short sales and foreclosures. The points of distinction between short sale and foreclosure could be summarized as follows:
Waiting Time: In case of loan companies complying with Freddie Macintosh and Fannie Mae recommendations, the borrower needs to hold back for 5 years after completion of a foreclosure to avail a new mortgage, subject to establishing the desired credit score. Whereas in case associated with short sales, the waiting period is just 2 years.
Benefits to the Customer: On February 18th, 2009, the Obama Administration announced the Making Home Inexpensive (MHA) Program. This program aims to stabilize the housing market by reducing mortgage obligations, on both primary and secondary mortgages, to affordable levels, thus preventing avoidable foreclosures. Borrowers, who are unable to retain their homes in spite of being covered under MHA, may opt for short sales instead of foreclosure. Under this plan, the homeowner may wake up to $1, 500 as relocation expense after short sales. Moreover, the seller does not have access to to pay taxes on forgiven debt provided the property that was sold had been his primary residence.
Benefits to the Lender: Under the Making House Affordable Program, lenders are encouraged to modify distressed loans to ensure affordable payments. As an extension of the program, lenders can also receive incentive payments as much as $1, 000 even if the homeowner's loan isn't modified, provided short sales are allowed.
Hence, in the current scenario, a short sale is more preferable than a foreclosure. However both foreclosures as well as short sales will force the borrower to operate at building his damaged credit history. According to Freddie Mac and Fannie Mae guidelines, assuming that the seller intends to buy a home some time again later on, he would require the absolute minimum FICO score of 680 with regard to loans. FHA insured loans might require the borrower to have a credit score of 580 with regards to getting a mortgage following foreclosure.
