I get a lot of calls from people who are looking for foreclosure or short sale help in Arizona. With these calls, I consult with a lot of people about their options when it comes to either walking away or pursuing a short sale. I will state at the outset that I almost always advise borrowers to diligently pursue a short sale as opposed to just walking away from their home and their loan. Also, to clear up some confusion, the “walk away” vs. the “short sale” decision is not an “either-or” proposition. Once you stop making your loan payment, you have started on the path towards a foreclosure (or trustee’s sale). The real question is not “foreclosure” or “short sale”, but rather can you successfully pull off a short sale before you get to the foreclosure finish-line.
Here are a couple of reasons why I believe a Arizona short sale is the much better option:
A SHORT SALE IS LESS OF A HIT TO YOUR FUTURE PURCHASING POWER
First off, it is almost impossible to state with certainty how a foreclosure or a short sale will negatively affect your credit score in terms of the decline of the score itself. However, a foreclosure and short sale are reported much differently to the credit bureaus and this reporting can affect your score tremendously. For example, if you pursue a short sale and your lender approves the sale, the lender’s short sale approval letter will almost always state that the “debt is settled for less than what was owed ” or the “debt is satisfied for less than full amount” and this is how the debt will be reported. If, on the other hand your home is foreclosed, the foreclosure will show up in the public records section of your credit report for up to ten years or more.
Additionally, regardless of how much your FICO score is negatively affected, your FICO score is also affected by things like the length of your credit history, your payment history, types of credit used, and total amounts owed. The much more significant difference between a foreclosure and a short sale is the long-term effects on your purchasing ability in the future.
After a foreclosure, a borrower is ineligible for a FHA loan for five years. After a short sale, a borrower is eligible for an FHA loan after only two years. Additionally, the Uniform Residential Loan Application (Fannie Mae’s Form 1003), Section VIII entitled “Declarations” specifically asks “Have you had property foreclosed upon or given title or deed in lieu of thereof in the last 7 years?” Another question on Form 1003 asks “Have you been obligated on any loan resulted in foreclosure, transfer of title in lieu of foreclosure, or judgment?” If the borrower answers “yes” to these questions, it will likely result in a higher interest rate. Importantly, there are no similar declarations or questions for a short sale on the Uniform Residential Loan Application.
As stated above, a foreclosure is reflected on your credit report for 10 years or more though there is no specific reporting item for a short sale on a credit report (other than what is stated above). Ultimately, a short sale will not affect your future purchasing power nearly as much as a foreclosure.
A SHORT SALE OFFERS A CLEAN-BREAK FROM THE PROPERTY
When you start to miss payments and begin on the path to foreclosure, the lender will first notify the trustee of the missed payments and inform the trustee to initiate the foreclosure (or trustee’s sale) process. The first thing the trustee will do is send to the borrower and record a Notice of Trustee’s Sale in the county where the property is located. The Notice will almost always state that the actual trustee’s sale or foreclosure will occur exactly 91 days after the date the Notice is recorded. However, this date is not set in stone and the trustee’s sale – for whatever reason – is often postponed by the trustee at the lender’s request. Most of the time, the borrower/homeowner will not be advised of the postponed trustee’s sale. If the borrower believes the trustee’s sale is supposed to occur on the originally noticed date and moves out of the property, the property will sit vacant for a period of time, if the trustee’s sale is postponed, while the borrower is still the title owner of the property.
This is important because in almost every deed of trust there are specific provisions that state that the borrower will be on-the-hook and potentially liable to the lender if the borrower allows any waste or damage to the property. If the borrower moves out of the property thinking that the trustee’s sale will be the in the next day or two and then the sale gets postponed, the property will be sitting vacant and it will be exposed to potential vandalism or other damage for which the borrower may be liable to the lender.
In the alternative, a short sale is handled like typical real estate transaction meaning that an escrow is opened and there will be a preset “closing date.” On the closing date, title to the property will transfer tot he buyer and the borrower/homeowner will be off-the-hook as to any waste or damage caused to the property. In other words, with a short sale, there is a clean break of ownership which is much, much better for the borrower/homeowner.
The two reasons cited above are two of the best reasons why borrowers/homeowners who have made up their minds to walk form their properties ought to seriously consider a short sale. If you need more Arizona short sale help on what option to pursue and what potential pitfalls there may be, please call us for a consultation.