SellAustinTexas

Let’s face it, some homeowners have gotten in way over their head on their property and just need to get rid of it. There’s just not a lot of buyers out there and they can’t sell it for what they paid for it. That leaves them with two options: Short Sale or Foreclosure. Most people who are underwater on their loans opt for Foreclosure – defaulting on the loan and giving the property back to the bank. Often people have not fully explored all their options with their lender and are unaware of the Short Sale option. In simple terms, a Short Sale is asking the lender to take less than what is owed on the loan. This allows a homeowner to lower the selling price of their home to a price point that will get it sold and prevents them from defaulting on the loan. Here are some major differences between a short sale and foreclosure.

1) Credit Score – Defaulting on a loan and going into Foreclosure will result in a 200-400 point hit on your credit score. That’s big and it will affect not only your ability to get another home loan but any credit card limits, car loans and any other purchases made from credit. A Short Sale typically will reduce your credit score from 50-130 points – a much more manageable hit.

2) Future Home Purchase – A Foreclosure on your record will prevent you from obtaining a loan anywhere from 5 to 7 years. However, if you are not behind on payments and opt for a Short Sale, you are eligible to purchase another home under Fannie Mae in 2 years. The wait for an FHA loan is 3 years.

3) Deficiency Judgement – Another more immediate cost associated with Foreclosures and Short Sales is the deficiency judgement. This is the lender asking for you to pay them the difference between the sales price of the home and the value of the loan. The government and the lender see this as income and could have tax implications along with the fact that the lender still wants money from you. Typically, with Short Sales these days, the lender is willing to forgive that difference. With a Foreclosure, the lender is less forgiving and usually goes ahead and issues a deficiency judgement for that difference.

Although neither is a good alternative to hanging in there and making the payments, pursuing a Short Sale has much less of a financial impact than a Foreclosure.  Here’s a link to some resources for preventing Foreclosure.

As reported by the AP on Wednesday, the Federal Housing Administration will soon be raising their fees and tightening their standards in order to bring more revenue for the agency. Expected to occur in spring or early summer, two major changes will be made:

1. The upfront mortgage premium will increase, from 1.75% to 2.25%. “A borrower taking out a $200,000 mortgage would pay a $4,500 fee, for example, rather than the current fee of $3,500 (AP).”

2. To qualify, borrowers will need a credit score of at least 580. (There was previously no standard credit score, although some lenders still required one.) If a borrower’s score is lower than 580, they will need at least 10% for downpayment.

The FHA does not make actual loans, but offers insurance against default. The new changes are considered some of FHA’s biggest steps in history addressing risk.