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Foreclosure vs. Short Sale – Which is a Better Option?

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By : Fredrica Smith    99 or more times read
Paying your mortgage on time can be the decisive factor for you to maintain ownership of your home. In case you fall behind such financial obligation, your lender would definitely find ways to take your home. One solution you can do is to sell your house. But given the existing liabilities attached to you and/or the property, you are left with but two options – enter either foreclosure or short sale. Even if these options might be regarded the least favorable of selling techniques, you still must further learn about them so you would know which one to pursue in case the circumstances call for it.

First thing you have to do is to consult your broker or lender regarding the current status of your mortgage. If at all possible, discuss with your broker some ways you can do to avoid entering either option, such as credit score improvement or looking for alternative financing. Furthermore, familiarize yourself with the attributes of these processes so you can be ready what to do in the future:

Foreclosure is labeled as the last resort for a home owner in case the lender wants to take away his property. This process is dubbed as such due to its distressing multifaceted effects. For one, aside from the looming loss of your home, the lender may demand you to pay for the costs accumulated during the foreclosure action. The lender may also give you a judgment from the court because of your outstanding arrears. And worst of all, the judgment would be reflected in your credit report. Thus, your credit score will suffer massively. This negative financial information may consequently lead to further challenges. For example, you would have to wait for about five to seven years before you would be offered with manageable mortgage rates in hopes of purchasing another home.

Short sale on the other hand may only be regarded as preferable because it can do less damage to your finances and credit standing. There are rare cases that show compassionate lenders to stall submission of negative information to the credit reporting agency. Those lucky enough to encounter such lenders only suffered a 100-point decrease in their scores. Also, borrowers who rather opted for this can purchase another home with relatively decent mortgage rates in about two years after the short sale took place.

But this option comes with disadvantages as well. Lenders are not particularly willing all the time to approve a proposal of short sale. This is mainly because they would have to agree that the profit from the sale would be way less than what the borrowers owed. Thus, the lender can choose to stall the process or dismiss it altogether. You should then be prepared to show proficient negotiating skills, present your true financial hardship letter and other pertinent documents for speeding up the approval.

Another condition lenders give prior to approving the short sale is to receive the borrower’s promise to pay for the discrepancy from the sale within a specific time frame. If once again you failed to pay the said amount, a deficiency judgment would be filed against you. Thus even if the short sale would be reflected in your credit report as a pre-foreclosure process with an attempt to redeem your property, the instance previously mentioned leans toward looking much alike a foreclosure.

Despite the differentiation between the two options, nothing seems to be favorable. Thus, the key thing you need to prioritize is to be focused on maintaining your on-time payments. With that in hand, worrying about entering either option would be a far cry for you.
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