In these harsh economic times, there are situations in which you simply have to bite the bullet and do what needs to be done. If you are sinking paycheck after paycheck into a mortgaged home that is not worth its value anymore, it’s time to cut your losses. Unfortunately, ridding yourself of a burdensome property is not as easy as Monopoly would lead you to believe. Do not be overly distraught just yet, though. There is an alternative to foreclosure that you should consider.
There are several reasons why an individual may be forced into either a short sale or a foreclosure. Unemployment, a nasty divorce, or lack of funds for whatever reason can lead you to such a point. Regrettably, it’s a difficult situation to stop once it has started; the lender tends to notice pretty quickly when payments have stopped coming in. Law requires that you get a warning of some sort, but by that point, your options are limited.
Foreclosure occurs when the bank takes back the property. This means that you have failed to make payments on your mortgage, and as collateral, the lender strips you of all property rights and takes the home from you. The long-term effects of foreclosure can be painful as well, affecting your credit and preventing you from purchasing another home for five to seven years. It is not uncommon for prospective employers to run credit checks as well, and a foreclosure on your record may cost you a much needed job opportunity.
A short sale, when possible, is a much better alternative. A short sale is when you sell the home for less than what you owe. The lender must approve the short sale, but because there are so many properties in foreclosure and programs supported by the government to help you through the short sale process, this can be a positive alternative. You are still forced to sell your home, but at least this way, it is on your terms.
Keep in mind that the lender has to agree to it first, and you may owe any deficits, depending on the agreement. This a better option than foreclosure, in that as long as you were never behind on your payments, you can purchase another home immediately. Although your credit scores will still drop, the term “short sale” will never appear on your credit report the same way a foreclosure would.
It sounds like a catch-22 but when forced into such a situation, you have to choose the lesser of two evils. Although a short sale will still hurt your credit score, there are ways to recover. It might take a few years, but with the right strategies, you can rid yourself of debt, raise your credit score, ensure that you are in never in such a position again and buy a new home much sooner.