Foreclosures, Short Sales and Loan Modifications

March 10, 2010

With the foreclosure rate at an all time high, how are people managing their options in this complex real estate market?

Residential real estate values have slid forty percent or more in various locations from their values at the peak of the market and unemployment in California is getting into the double digits. Across the country, more than a third of mortgage holders owe more than their properties are worth. More than an eigth of all mortgages are behind on their payments or in default on a nationwide level.

If you are at the point of defaulting on your mortgage, there are three basic options: loan modification, short sales and foreclosures. A lot of the advise you will get these days would point towards the short sales, because they offer an upside to buyers, lenders and real estate agents. But are short sales the best option available to the actual home owner?

Often times, it really is not the best option to pursue, although those involved in the process may lead you to think otherwise.

If we take a closer look, we can see the consequences to various actions. The first question is what to do when you realize you can no longer pay your home loan. What happens should you suddenly stop paying?

Right off the bat, it will damage your credit. Your credit score is crucial to future lenders who will decide at some later point whether they want to lend you money, and could make you seek out private money loans if you should need a loan. Additionally, your credit score is also being used by employers and landlords, to name a few. Deciding to move forward with an action that can ruin this score is something you really need to consider carefully.

Your FICO, or credit score is calculated through arcane and proprietary formulas using information compiled over time from your credit files. The people in charge of these scoring systems say that they are supposed to be an indicator of how likely someone is to stop paying on a debt or loan during the first two years.

There are a number of companies other than the big three that have their own scoring models, most running numbers between 500 and 900. If you stop making payments, most of the models will lower your score into the 600 range or lower

If your credit score is below 650 in today’s market, finding a loan of any kind can be very difficult (unless you are looking at going with private hard money lenders). If obtaining a loan in the near future is a goal of yours, doing a short sale of your property will not keep your credit in pristine shape, contrary to what many will have you believe. So what is the benefit of short selling your home?

The biggest benefit is getting the debt you owe forgiven (be sure to read the fine print), and keeping a foreclosure off your credit report. A short sale usually will impact your credit about the same as a foreclosure, but by going through the short sale rather than a foreclosure, you will be allowed to get another real estate loan in as little as two years, as opposed to three or more that a foreclosure will require.

You may want to consider looking into loan modification. Oftentimes, this is a lenghty process to work with the banks on, but if you would like to stay in your home and save your credit, a loan modification may be a better avenue to consider.

You need to be sure to do your own research before you decide what course of action you are going to pursue. Also remember that different states have different laws and there will be different ramifications for the various options. Find a good real estate agent and/or real estate lawyer, sit down, and go through all your options before you make a choice. Making this decision is a big deal, and it is important to surround yourselves with professionals who will help you make the best decision possible!

Foreclosures, Short Sales and Loan Modifications

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