The latest San Francisco real estate trends and statistics indicate that the total amount of foreclosures and short sales in the city have remained fairly constant over the past year. That doesn’t mean there are not a lot of home owners out there who are underwater and simply cannot make up their mind about what to do. Should I opt for a foreclosure on my property? Or would I be better off going with a short sale?
This article helps clear the air on both these choices so that you can make the most informed decision possible.
Understanding a Short Sale vs Foreclosure
The first step would of course be to understand these terms completely. Only then can you really make an informed decision on what is best for you.
Foreclosure is a situation where you are unable to make mortgage payments on your property, the lender seizes and sells the property, in line with the terms of the mortgage contract.
A short sale on the other hand is a situation where YOU, the home owner would sell the property to a third party, at a price which is less than the market value of the property. Once sold, all the proceeds from the sale would go to the lender.
Choosing between Short Sale vs Foreclosure
No doubt, neither of these two options makes for an idyllic choice. It is simply a case of choosing between the lesser of two evils. At the same time, as you delve deeper, you will find that both these options can prove to be the saving grace, given the situation at hand.
When Homes (Dramatically!) Lose their Worth!
The ongoing real estate issues in the United States has meant that there are a lot of homes which are still completely under water. The valuation when you took out the mortgage, is nowhere near the real value of the home now.
Imagine a home you purchased for $500,000 five years ago is only worth $300,000 today…clearly the monthly mortgage payments that you are making towards the home are going into an axiomatic sinkhole!
In such a scenario, it would make sense to opt for a short sale; the lender quickly gains access to the real worth of the property while you are relieved of mortgage payments.
Other Instances when you would find Short Sale making “Perfect” Sense!
- You are facing a major financial crisis in your life such as the loss of your job
- You are already well behind on your mortgage payments
- You are simply not eligible to either modify your mortgage or refinance your property
- You have tried hard but have been unsuccessful in selling your home at a price that at least covers what you still owe on the mortgage
So is Short Sale the Proverbial Solution?
No, short sale is by no means a cure-all to the financial dilemmas you are facing with your home. Remember what we mentioned above, about choosing between the “lesser of two evils”? Well, that is exactly what choosing between a foreclosure and a short sale is all about, since you would be picking between two options which are in many ways just as undesirable.
Accordingly, let us look at some specific aspects that you can ask yourself, when compelled to make this difficult choice between foreclosure and short sale.
Does it Negatively Impact my Credit Rating?
No question about it. If you choose to do a short sale or even foreclose on your home, your credit score will take a hit. The severity would be considerably more with a foreclosure and it can also take up to seven years to get yourself back to your pre-foreclosure level.
What about Deficiencies in the Outstanding Loan Amount?
A short sale does not really take away obligations that you have on your overall loan amount. Even if you are able to obtain 85 or perhaps 90 percent of your outstanding loan amount via a short sale, the lender may still seek out the remaining 10 to 15 percent. It is completely up to them.
Thankfully, in California, the Code of Civil Procedure, under Sections 726 and 580e among others, prohibits deficiencies once a short sale has been made. So as a San Francisco Bay Area home owner – or anywhere in California for that matter, you certainly stand to benefit, if you opt for a short sale.
Some Psychological Benefits of Opting for Short Sale
It may be noteworthy to also look at some psychological benefits of short sale vs foreclosure:
- Social stigma attached to a short sale is nowhere near that of a foreclosure
- There is a lot of respect and dignity attached with going for a short sale vs foreclosure
Clearly a short sale brings with it a variety of advantages as compared to opting for a foreclosure. At the same time, as we have emphasized in this article, a short sale should not be construed as the optimal solution – remember you are choosing between what are essentially two hard choices.