Short sales and foreclosures are both two sides of the same coin. During a foreclosure, the bank will sell your home to recoup their investment whereas, during a short sale, your lender agrees to accept a reduced amount for your house. Both the short sale and the foreclosure will reduce your credit score, but there is a significant difference between the financial and psychological impact of foreclosure and a short sale.
A Short Sale Saves You Money
A foreclosure imposes a sale of your house when you are several months behind on mortgage payments. The bank will sell your home to recoup the loss. On the other side, a short sale is needed if you are upside down on the mortgage. A short sale is the only effective strategy if you are underwater.
There are millions of homes in the US that are considered underwater. A house is considered underwater if the loan amount is more than 25% of the house value. If the value of your home is $200,000, but your mortgage amount is $225,000; you have an underwater house. The problem with upside down mortgage is that, doesn’t matter how much you try, you’ll never earn a profit. You are paying for an overpriced property. Even if you pay back your loan entirely, you are only losing money. Your mortgage payments are not making up the equity of your house.
Here we are talking about the best-case scenario. What if you are underwater on the house and you can’t continue to pay your mortgage? It might seem that a foreclosure is inevitable in such cases, but you can still contact your bank to negotiate a short sale.
You don’t have to worry about the deficiency judgment
What’s a short sale?
It is a sale where the lender accepts less than the owed amount for the house. The point is to pay off your mortgage. You can’t do the same if you throw your hands and let the bank foreclose the property.
After completing the foreclosure process, you are still responsible for paying the remaining balance. The bank can impose a deficiency judgment to recover the pending amount. If that occurs, you have lost your house plus you are responsible for paying the remaining balance.
A short sale is different. You don’t have to pay the remaining balance. Let say the fair price of the property is $180,000, but the mortgage amount is $225,000. After a short sale, you won’t have to pay the remaining $45,000.
It is important to note here is that any forgiven debt is considered to be your income. The IRS treats forgiven debt as gain, and the amount will be taxed accordingly.
A Short Sale Protects Your Credit and Your Financial Future
A foreclosure stays on your credit report for seven years. A short sale with extenuating circumstances will remain on the report for 2-3 years.
It’s also important to observe that a foreclosure drops your score by 100-150 points. Your credit score will also reduce after you complete a short sale but the effect is less drastic. You can rebuild your credit quickly after a short sale.
You can Sell Your Home with Dignity
It is imperative to avoid foreclosure at all costs because of the social stigma attached to this phrase.
A short sale is a convenient option. You can sell your home with dignity. You are in control of the process. Meet the buyer. Negotiate the deal, know the terms of the agreement and sell your home on your terms.
If you have an underwater house and you would like to get rid of the burdensome property, then you should pursue a short sale of the home. Consider calling a hardworking RE solutions company in Connecticut. A reputable cash buyer can help you negotiate a better price with the lender and can also buy your home as-is for a cash price.