The foreclosure process can be very stressful for homeowners; some home homeowners get so depressed, that they do nothing, some 57% of homes get foreclosed on and the owner never called their lender to work out a loan mod or ask for help!. While others who are proactive sometimes end up being given the wrong advice or make decisions that are not well informed. If you are a homeowner dealing with this situation, you will have to make a decision on whether to get your property sold as a Short Sale usually at the discount approved by your lender, or give the property back to them as a Deed-In-Lieu of Foreclosure or just let them complete the Foreclosure. You need to decide which of these three options is the best for you both in the short and long term? Deciding which option to take might be tough especially if you do not know how each will affect your credit and ability to buy a home in the future.
Short Sale VS Foreclosure VS Deed-In-Lieu of Foreclosure
A short sale transaction occurs when a lender agrees to a discounted payoff on the loan balance, due to the financial hardship experienced by the homeowner and/or a decrease in the resale value of the property. A short sale is the best option if you are facing foreclosure because it is a lesser financial loss. You get to avoid foreclosure, reduce the adverse effects on your credit and increase your chances of getting a loan to buy a home within a shorter period of time.
Foreclosure occurs when a lender sells or gets back a parcel of real property, after the owner failed to conform to their mortgage or deed of trust agreements. The estate becomes the absolute property of the lender. The foreclosure process generally starts with a formal demand for payment in the form of a letter called Notice of Default (NOD) issued from the lender. It varies from state to state but in most cases the lender usually issues this notice when the homeowner has been 3 months irregular on their mortgage payments. The notice is typically a warning that they will sell your property if you do not make your payments current.
Deed in Lieu of Foreclosure is the alternative to a foreclosure. This is a settlement, which is voluntarily made, and in good faith in which the borrower surrenders their house to the lender and moves on with nothing owed. The main advantage for the borrower is that it immediately releases them from the debt associated with the defaulted loan. The borrower also avoids a painful and time consuming foreclosure. The main advantage for the lender is a reduction in the time and cost of repossessing the property. In most cases a lender will only accept a deed in lieu if there are no other liens attached to the property or these liens can be significantly reduced. The reason is because they do not want to be responsible for the other liens that are attached to the property; this is why most lenders will push for a foreclosure instead because it removes all junior liens.
How does each of the three options affect your credit and the length of time it will take to buy another home?
Short Sale: This the best option for a homeowner facing foreclosure due to its reduced adverse effects on their credit and their ability to get a loan to buy another home in a shorter period of time.
Short sale credit reporting options are:
• Paid Settlement – In which, credit score will drop 50-150 points or more depending on the number of missed payments.
• Paid, As Agreed – in which, won’t hurt the score at all as long as the borrower is paying regularly.
• Unrated – In which, may drop a few points.
Fannie Mae & Freddie Mac guidelines states that the waiting period before you can buy a new home is 2 years from the date the proceeding is completed. And there is no exception for extenuating circumstances.
Foreclosure: This is the least advantageous of all of the three options; it will remain in the credit report for 7 years from completion date and the credit score will drop from 50-250 points. Another disadvantage is that when Deficiency Judgment or Tax Lien is filed the credit score may drop an additional 100 points.
Fannie Mae & Freddie Mac current guidelines state that the waiting period is 5 years from the date of foreclosure completion proceedings.
Below are requirements in addition to the 5 years up to 7 years after completion date:
• Purchase of a primary or principal residence is permitted, 10% minimum down payment and the minimum credit score is 680.
• Purchase of a second home or property investment is not permitted.
• No cash-out refinance is permitted.
Extenuating circumstances are acceptable such as loss of employment and severe medical crisis and if approved the waiting period is 3 years from the date of foreclosure completion proceeding. The same additional requirements are applied as above except the minimum credit score of 680 is not required.
FHA Guidelines state that the waiting period for a foreclosure is 3 years from the foreclosure completion proceedings. However if foreclosure is a result of extenuating circumstances such as serious illness or death the lender may grant an exception.
Deed in Lieu of Foreclosure: Credit scores will carry the same serious effects as Foreclosure because most lenders report a deed in lieu of foreclosure as foreclosure. However the reality is that what is reported can actually be negotiate with the lender. It will remain on the credit report for 7 years from settlement completion.
Deed in Lieu credit reporting options:
• Paid Settlement – In which credit scores can drop up to 150 points
• Paid as Agreed- Credit scores show a dropped over 100 points due to default in payment but with this option borrower could purchase a home in a short period of time.
Fannie Mae & Freddie Mac guideline state that the waiting period for a Deed in Lieu of Foreclosure is 4 years from the date of completion proceedings.
Additional requirements after 4 years up to 7 years from completion date:
• Greater than 10% minimum down payment required for the transaction or purchase of investment property, principal residence or a second home by a borrower.
• There is a limited-cash-out and cash-out refinance are permitted if eligible and meet the requirements.
• Extenuating circumstances, physical condition such as medical crisis or other factors such as loss of employment that caused a borrower to choose the option Deed In Lieu of Foreclosure, the waiting period is 2 years from the completion proceedings.
In summary, the guidelines stated above clearly show the advantages for you to choose to short sale your property compared to allowing it to go into foreclosure or deed in lieu because the adverse effects to your credit is reduced and also, you will just have to wait 2 years to get a loan to buy another home instead of 4 years with the deed in lieu option or 5 years with the foreclosure.
If you have additional questions please feel free to email or call me.