In a foreclosure, the lender initiates the process, essentially seizing the home after the owner has failed to make payments. The foreclosure process is generally faster than a short sale, as the lender seeks to liquidate the assets as quickly as possible. In many cases, buying a short-sale property can be advantageous for prospective buyers. However, it is important to be aware of some of the drawbacks involved. Short sales can take a long time, with lenders sometimes taking months to approve the transaction.
After the seller's approval, it may also take many weeks for the bank to approve the price. If the bank believes that a foreclosure proceeding is more lucrative, it may reject the short sale and move forward with foreclosure instead. A short-sale property can provide an excellent opportunity to purchase a house for less money. In many cases, short-sale homes are in reasonable condition, and while the purchase price might be higher than a foreclosure, the costs of making the home marketable can be much lower, and the disadvantages to the seller less severe.
However, because of the lengthy process, buyers and sellers must be willing to wait. An experienced real estate agent can help you determine a fair offer and negotiate with the bank. While many investors purchase short-sale properties and quickly resell them for a profit, others choose to maintain ownership and use the property for income by collecting rent.
In either case, each property must be carefully evaluated prior to purchase to determine if it has profit potential. Because tax laws are complicated and constantly change, it is always recommended that you consult with a certified public accountant CPA who knows about real estate investing and related tax laws to give you comprehensive and up-to-date information. It can mean the difference between making a profit and taking a loss on an investment.
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Create a budget. To rebuild your credit, you will need to pay down your remaining credit card debt. A budget can help ensure you know how much money you have coming in each month versus how much goes out to cover minimum debt payments and living expenses. Pay your bills on time. Closing a credit card negatively impacts your credit score by reducing the age of your accounts and lowering your credit utilization ratio.
Apply for new credit. If you have a hard time getting approved for a major credit card, start with a secured credit card or credit builder loan. If you have equity in your home, you may be able to refinance your mortgage with a lower interest rate or longer term to reduce your monthly payments.
Loan modification. Forbearance is usually granted for three to 12 months. At the end of the forbearance period, the lender will expect all of your missed payments, either in a lump sum or through a repayment plan. Deed in lieu. Rather than go through a costly and time-consuming foreclosure process, you may voluntarily transfer the deed to your home to the lender. While there are benefits to this approach, which are elaborated below, from a credit perspective, there's really no difference between a short sale and allowing your home to go into foreclosure.
Because short sales and foreclosures both fall under this umbrella category, most lenders won't distinguish between the two, and both stay on your credit reports for seven years. Here's how a short sale works: When you sell your house, all proceeds usually go to the lender. This doesn't necessarily mean you paid back your mortgage. Often, there's something called a deficiency, which is the amount still due on your mortgage after the proceeds of the sale are sent to the lender.
What are your obligations regarding the deficiency? Some lenders may ask you to sign a new promissory note saying you'll pay the remaining debt, while others may simply reserve the right to bill you for the debt. A bank can begin attempts to collect the money from you immediately after the short sale closes, and some lenders may turn the matter over to a collection agency. However, certain states have laws in place preventing banks from seeking this deficiency payment.
The main benefit of a short sale is the possibility of being forgiven for a portion of your loan. That scenario, however, doesn't play out for everyone. You will need to reach an agreement with the lender that you won't be held responsible for your remaining loan balance after the property is sold. If an attempt to pursue a short sale has failed, you may enter foreclosure proceedings, which can also seriously damage your credit scores.
Fortunately, for people who are struggling to keep up with mortgage payments, federal officials have announced a temporary nationwide halt to foreclosures and evictions for federally-backed mortgages. If you're one of more than 30 million U. If you have lost your income whether because of a business shut down, unpaid sick leave or another reason related to the virus , you may qualify for reduced or suspended mortgage payments for up to a year. You must contact your loan servicer to request this forbearance.
If your mortgage is held by Fannie Mae or Freddie Mac , check with them, as both are offering aid to their borrowers. Credit scoring aside, a short sale can also be a better option than foreclosure because you won't need to wait as long to qualify for an FHA loan if you want to buy another home. A short sale could impact your credit scores as long as it remains in your credit reports, which may be up to seven years—similar to many other negative marks.
If the short sale was preceded by one or more late payments, the seven-year timeline starts with the date of first delinquency that led to the short sale. If you never missed a payment, the mortgage account will fall off your credit report seven years after your account was reported as settled. How to Start Rebuilding Your Credit After a Short Sale As with other major derogatory events, it can take a long time for your credit scores to recover from a short sale.
It may be several years before your score fully recovers if you previously had a good credit score. Or, you may have to wait the full seven years if you had an excellent score. People who have higher scores tend to experience larger score drops from new negative information in their credit reports.
In the meantime, similar to what you might want to do after a missed payment, bankruptcy or foreclosure, you can look for ways to rebuild your credit. If you're running into trouble with other bills, reach out to your creditors before you miss a payment.
Ideally, you'll be offered a different repayment plan or a hardship program that's easier to manage and can help you avoid additional negative marks on your credit. You can also sign up for an Experian account to monitor your credit for changes. The complimentary credit monitoring can also send you alerts, warning you of potential identity theft or fraud. If you do find something is amiss, you can address it quickly. It's Time for That Loan Whether you are shopping for a car or have a last-minute expense, we can match you to loan offers that meet your needs and budget.
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