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Just a couple years ago, most people usually thought they had to give up their home in a foreclosure when they faced a financial stonewall. However, since then the phenomenon of short sales has been on the rise, leaving homeowners a bigger, better and brighter option for the present and future. In this article, we explore the comparative differences between the two so you can gain an edge when deciding which is better for you.
Purchasing Power
After walking away from your mortgage through a foreclosure, you can expect to feel the negative impact of it for five years, in terms of being able to purchase another home. Even then, like a bankruptcy, a foreclosure is something you will perpetually have to report no matter how long it has been since the home went into foreclosure.
Though these days you see a lot of talk about the financial and credit impact foreclosures have on homeowners, the unseen part of it is something to be dealt with. Going through this process can leave a lasting emotional hole in people who otherwise were law-abiding citizens, going about their normal lives when all of a sudden they are faced with severe financial hardship and must resort to extreme measures. That, or if the value of their home has dropped well below the amount they paid for it and they see very little hope for the future.
Short sales are much simpler. They will affect your purchasing power for a mere two years, often just the amount of time it takes to get back on one’s financial feet. Not only that, there is no requirement to report a short sale transaction.
Credit Outlook
There are two main areas that are of concern when it comes to your credit – your credit score and your credit history. In case of a foreclosure, credit scores drop a whopping 200 to 300 points. This can have a significantly negative impact on your ability to purchase big-ticket items or secure loans in the future. Not to mention it takes years to rebuild a credit score that has dropped that low. In terms of credit history, a foreclosure remains visible on your credit report for anywhere from ten years or more, rendering each future potential lending transaction either useless or very hard-pressed at getting approved. The overall impact you will see on your credit will be for about three years.
Short sales are far easier on your credit outlook, in that the point drop is only about 50 on average and the transaction itself will impact your credit profile for as relatively little as 12 to 15 months. The one thing to keep in mind is that if you have defaulted on any payments or if you already have a weak credit profile, the post-short sale point drop on your credit report can be more than just 50. Also, there is no formal reporting or declaration of a short sale on your credit report like a foreclosure although the transaction will show up as either settled or not paid in full.
Amount Still Owed
Usually there is a gap in the amount owed after owners walk away from a property and the bank assumes responsibility. In case of a foreclosure, given the amount of processing time and resultant vulnerability and exposure of the property, the value can and often does drop greatly after vandalism and from sitting there unused. The Deficiency Amount (also called Judgment Amount) is the difference that remains after the bank calculates what was owed on the property at the time of foreclosure and when they sold the home. Because of this vandalism and vulnerability, the amount of value drop is far more than with a short sale, when the homeowners are still residing in the property during processing. The bank has the legal right to pursue homeowners for the amount difference.
Short sales differ in that not only is the deficiency amount much less but also, your Realtor can negotiate a waiver of that amount so you don’t have to pay for it.
As the name implies, when a person owning a property with a mortgage on it faces difficult times that result in an impact on their ability to pay the loan, the need to communicate to the lender arises. Regardless of whether the loan can no longer be paid in a timely manner or if it is difficult to pay most of it – there are some avenues other than leading to foreclosure that the homeowner can pursue.
Loan Modification Hardship Letter
There are two types of hardship letters that are commonly written in light of the nation’s challenged real estate market these days. First, a loan modification hardship letter is the initial communication between the homeowner and lender, notifying them of the financial hardship but with the intention to manage most of the loan. The goal of a loan modification is to hold on to the home, only reduce the amount owed or in other words, adjust the loan. The basic language in this type of hardship letter states the type of hardship the property owner is facing, their intention to continue living on site and the expected amount sought to be modified in order for the owner to manage.
Short Sale Hardship Letter
Unlike a loan modification, where the property owner is able to continue living in the residence with the provision of a smaller loan, a short sale request entails the bank accepting less money than what is owed on the home, through a sales transaction. This occurs when the value of the home is worth less than the amount owed on the mortgage. A common occurrence lately, short sales are an alternative option to many homeowners who are unable to maintain their mortgage payments due to job loss, medical situations or anything else.
Given the state of our current economy, there are many cases of short sale applications and each begins with a hardship letter stating that the homeowner’s financial situation does not seem to be improving anytime soon and the only viable option is to move out to avoid foreclosure. Banks prefer this to foreclosures since the latter often result in legal fees and other costs that would not necessarily occur in a short sale transaction. Making that determination, however, is what impacts the amount of time that goes into a short sale application and approval or denial process.
What Should Be Included?
Not too much information is needed in a hardship letter but it should be enough that the reviewer is able to make an informed decision about your case and determine next steps. You will need to include the property address, reference a loan number or numbers if multiple loans are involved and name all persons or parties that are named on the loan. If the motivation for seeking relief from the lender is due to extreme conditions in your life that have hindered your income or caused unemployment, provide supporting documentation and outline the relevant specifics in the letter. Over-exaggerating will frustrate the loan officer and possibly impede processing so it’s important to remain straightforward and write in a clear manner.
Things to Keep In Mind When Writing
Be sure to write clearly, without the use of unnecessary jargon and be as direct as possible. Avoid overly emotional statements, without missing the boat entirely on explaining your financial hardship. Do not write more than one page, as the hardship letter’s purpose is to notify the lender of your current financial state and request review of the loan. The briefer the letter is, the easier it will be for the loan officer to review it. Make sure you are able to corroborate the statements you are making in the letter with documentation.
Why Does This Matter?
Despite news reports, the mortgage industry is very busy and with the influx of short sale applications on many lenders’ tables, the processing times are very long involving arduous and tedious paperwork. When a short sale reviewer receives a short, simple, succinct and to-the-point hardship letter, not only does it make their job easier but it also eliminates the need for further clarification and consequently more time wasted.
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Of course, depending on how complex the situation may be – a longer and more detailed hardship letter may be necessary, but once an application moves forward additional information can be provided. The key is to communicate your request to have your loan reviewed, the reasons for such and relevant specifics that would be needed in order for the application to be considered.
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