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Just a couple years ago, most people usually thought they had to give up their home in a foreclosure when they faced a financial stonewall. However, since then the phenomenon of short sales has been on the rise, leaving homeowners a bigger, better and brighter option for the present and future. In this article, we explore the comparative differences between the two so you can gain an edge when deciding which is better for you.
Purchasing Power
After walking away from your mortgage through a foreclosure, you can expect to feel the negative impact of it for five years, in terms of being able to purchase another home. Even then, like a bankruptcy, a foreclosure is something you will perpetually have to report no matter how long it has been since the home went into foreclosure.
Though these days you see a lot of talk about the financial and credit impact foreclosures have on homeowners, the unseen part of it is something to be dealt with. Going through this process can leave a lasting emotional hole in people who otherwise were law-abiding citizens, going about their normal lives when all of a sudden they are faced with severe financial hardship and must resort to extreme measures. That, or if the value of their home has dropped well below the amount they paid for it and they see very little hope for the future.
Short sales are much simpler. They will affect your purchasing power for a mere two years, often just the amount of time it takes to get back on one’s financial feet. Not only that, there is no requirement to report a short sale transaction.
Credit Outlook
There are two main areas that are of concern when it comes to your credit – your credit score and your credit history. In case of a foreclosure, credit scores drop a whopping 200 to 300 points. This can have a significantly negative impact on your ability to purchase big-ticket items or secure loans in the future. Not to mention it takes years to rebuild a credit score that has dropped that low. In terms of credit history, a foreclosure remains visible on your credit report for anywhere from ten years or more, rendering each future potential lending transaction either useless or very hard-pressed at getting approved. The overall impact you will see on your credit will be for about three years.
Short sales are far easier on your credit outlook, in that the point drop is only about 50 on average and the transaction itself will impact your credit profile for as relatively little as 12 to 15 months. The one thing to keep in mind is that if you have defaulted on any payments or if you already have a weak credit profile, the post-short sale point drop on your credit report can be more than just 50. Also, there is no formal reporting or declaration of a short sale on your credit report like a foreclosure although the transaction will show up as either settled or not paid in full.
Amount Still Owed
Usually there is a gap in the amount owed after owners walk away from a property and the bank assumes responsibility. In case of a foreclosure, given the amount of processing time and resultant vulnerability and exposure of the property, the value can and often does drop greatly after vandalism and from sitting there unused. The Deficiency Amount (also called Judgment Amount) is the difference that remains after the bank calculates what was owed on the property at the time of foreclosure and when they sold the home. Because of this vandalism and vulnerability, the amount of value drop is far more than with a short sale, when the homeowners are still residing in the property during processing. The bank has the legal right to pursue homeowners for the amount difference.
Short sales differ in that not only is the deficiency amount much less but also, your Realtor can negotiate a waiver of that amount so you don’t have to pay for it.
