Whether you’re a buyer or a borrower/seller, a short sale, and foreclosure each present different advantages and difficulties.
What Is A Foreclosure In Fort Myers, FLORIDA?
In simple terms… “A foreclosed home is one in which the owner is unable to make his mortgage loan payments and the bank repossessed the home” (source). If you stop making your house payments… your lender has the right to foreclose on your property so they can attempt to recoup their money that was lent to you.
A home is typically foreclosed on when a borrower fails to make mortgage payments, a situation that often arises due to financial hardships such as job loss, medical emergencies, or other unexpected expenses. When the borrower defaults, the lending institution steps in, assuming ownership and possession of the property. The eviction process then removes the borrower from the home, allowing the lender to take control of the asset. This process can be both emotionally and financially devastating for the borrower, who loses not only their home but also the investment they have made in it. The foreclosed properties are then sold, often at auctions where the highest bidder wins the property, or through more traditional means that involve real estate agents who list and market the homes to potential buyers.
The impact of foreclosure on a borrower’s credit rating is profound and long-lasting. A foreclosure is a significant negative mark on a credit report, indicating a serious default on a major loan. This can lower the borrower’s credit score substantially, making it difficult to qualify for new credit or loans. The repercussions extend beyond the immediate financial damage, as securing a mortgage in the future becomes extremely challenging. Most lenders view a history of foreclosure as a high risk, leading to stricter lending criteria and higher interest rates if a new mortgage is granted at all. The financial strain and reduced creditworthiness can hinder the borrower’s ability to recover and re-enter the housing market for many years, underscoring the severe consequences of foreclosure.
Depending on the state that you live in… a foreclosure can work in different ways. Check out the foreclosure process information over here at the HUD Government website.
What Is A Short Sale?
In a short sale, the home is still owned by the borrower.
The definition of a short sale is… “A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property, and the property owner cannot afford to repay the liens’ full amounts and where the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt” (source: Wikipedia)
In some cases, a short sale is an option agreed upon by borrowers and lenders to avoid the more drastic measure of foreclosure. During a short sale, the home is sold for less than the outstanding balance of the mortgage, a situation often arising when property values decline and the market value of the home falls below the amount owed. This arrangement requires the lender’s approval, as they agree to accept less than the total amount due on the loan. The lender benefits by potentially recovering more of the loan than they would through a lengthy and costly foreclosure process, while the borrower avoids the severe credit impact associated with foreclosure. Additionally, a short sale can allow both parties to move forward more quickly and mitigate the financial and emotional toll of a drawn-out foreclosure proceeding.
The unpaid balance, known as the deficiency, may or may not still be owed by the borrower depending on the terms negotiated with the lender and the laws of the state where the property is located. In some instances, lenders may forgive the deficiency, releasing the borrower from further financial obligation. However, in other cases, lenders might pursue a deficiency judgment, seeking to recover the remaining balance. The borrower’s financial situation and the lender’s policies significantly influence these outcomes. For borrowers, it’s crucial to understand the potential tax implications and credit consequences of a short sale, as forgiven debt can sometimes be considered taxable income. Therefore, engaging in a short sale requires careful consideration and often the guidance of real estate and financial professionals to navigate the complexities involved.
This option typically takes some time, as a few different lending institutions may own the mortgage. All parties who have a stake in the property must agree to the terms of the sale, and a potential deal could fall through if even one lender doesn’t agree.
Short Sale vs Foreclosure – Your Options
While both options can have ramifications, a short sale often has less of an impact on the borrower’s creditworthiness. A foreclosure could impact a borrower’s credit score by 300 or more points, where a short sale may only dent the credit score by 100 points.
Borrowers who are foreclosed on are often ineligible to purchase another home for 5-7 years with a traditional mortgage, where under certain circumstances, a short sale borrower can purchase immediately.
As many Americans struggle with an economy that has yet to completely recover from the 2008 crash, folks are having a hard time making monthly mortgage payments. Choosing between being foreclosed and initiating a short sale (or a 3rd option… selling your Fort Myers house fast )is an easy choice for a borrower having troubles paying their mortgage on time.
Sometimes, lenders are willing to work with borrowers to complete a short sale, to avoid the fees and time-consuming process of conducting a foreclosure.
Our suggestion is always this.
- Talk with your lender and discuss ways that they can work with you on your loan. We offer this service where we can help guide you in the right direction if you run into issues with your lender… just reach out to us on our Contact page and we’ll discuss your situation.
- Attempt a short sale or other programs your lender may have that forgives part of your loan, creates a new / more affordable monthly payment so you can get back on your feet, etc.
- If the bank isn’t willing to work with you very much… your best option may be to sell your house. Work with a local real estate house buyer service like Core Real Estate Properties to sell your house fast for an all-cash offer. If you’re interested we can look at your situation and make you a fair offer on your house within 24 hours. Just fill out the form on our website over here >>
- Foreclosure. Last resort is to let the house fall into foreclosure. This is the worst possible scenario. It’ll harm your credit and you could still be left with money owed to the bank even after the foreclosure is finished.
By knowing your options, you may be able to dodge a significant impact on your credit score, allowing you to purchase a new home when your situation improves. A foreclosure on your credit report makes that possibility extremely difficult for 5-7 years, so if you have the opportunity, a short sale can be the better option.
Have a pending foreclosure? We’d like to make you a fair all-cash offer on your house.