With the foreclosure rate at an all time high, how are people managing their options in this complex real estate market?
Values of homes have fallen thirty, forty, even fifty percent or more in some places from their peak values and unemployment in states such as California is above the ten percent mark. Across the country, more than a third of individual homeowners owe more than their homes are worth. More than an eigth of all mortgages are behind on their payments or in default on a nationwide level.
If you are aproaching the point of defaulting on your loan, you basically have three options: loan modification, short sales and foreclosures. Many professionals these days are advising a a short sale, as they offer an upside for Realtors, agents, lenders and buyers. But is a short sale really your best option when looking at a potential default?
Typically, the answer is going to be no, even though those working with you in the process might want you to think otherwise.
Why might this be? Let’s take a look. The first question is what to do when you realize you can no longer pay your home loan. If you should stop making payments, what will happen?
First, it will really hammer your credit score. Your credit is crucial to future lenders who may have to decide at some later point just how good a risk you are, and may force you into working with private money lenders down the road. Additionally, your credit score is also being used by employers and landlords, to name a few. Ruining your credit is not something to rush headlong into.
The score itself is figured using outdated and company owned methods that use information collected throughout your life as a borrower. According to the credit bureaus, these scoring systems are meant to give an indicator of how likely you, as a borrower, are to default on a loan during the first two years it is out.
There are a number of companies other than the big three that have their own scoring models, most running numbers between 400 and 990. If you stop making payments on all of your loans, most of these formulas will drop your score below the 600 mark.
If your credit is in under 680 based on one of the major credit reporting agencies in today’s lending environment, putting together a loan of any type can be incredibly difficult (unless you are looking at going with private hard money loans). If obtaining a loan in the near future is a goal of yours, a short sale of your property will not save your credit, contrary to what many in various industries might tell you. So are there any benefits to short selling your house instead of walking away?
The biggest benefit is getting out from under the debt you currently owe, and avoiding a foreclosure on your credit. A short sale usually will impact your credit score about the same as a foreclosure, but with a short sale, you will be able to get another conventional type loan in as little as two years, rather than 3 or more that a foreclosure will require.
You may want to consider looking into loan modifications. This can be a long process to work through, but if you need to stay in your home and save your credit, a loan modification may be a better avenue to consider.
Be sure to do your own research before you decide what course of action you are going to pursue. It will also matter in which state you live, as there will be different ramifications for the various options. Seek out a good real estate agent and/or real estate lawyer, make an appointment, and look at all your options before you make a decision. 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!