We get asked this question quite often. In a rapidly changing market, it is difficult to give absolute answers. Much depends on your family’s personal situation. However, if you realize that you can no longer make the payments, you may have to decide between doing a short sale or letting the home go to foreclosure. Here are three things you may wish to consider:
1.) Impact on Your Future Ability to Get a Mortgage
There are many different lending institutions, each with their own requirements when it comes to your ability to obtain a mortgage in the future. However, a common trend is to be much more lenient with someone working through a short sale rather than letting the house go to foreclosure. As an example, the Fannie Mae site, Know Your Optionsexplains you:
May be able to get a Fannie Mae mortgage to purchase a home sooner (in as little as 2 years) than if you went through foreclosure (at least 7 years)
You can get further information here. However, in a rapidly changing environment, make sure you get the latest information available from the actual lending institutions mentioned.
2.) Impact on Your Credit Score
There has been much dialogue on this issue. The question is whether or not a foreclosure will have a more severe impact on your credit score than a short sale. A recent FICO study sheds needed light on this question. Here is a chart from that report. The first chart shows the impact on the score for each stage of delinquency, and the second shows how long it takes the score to fully “recover” after the fact.We can see that there is very little difference in impact on your credit score whether you choose a short sale or a foreclosure.
3.) Impact on Your Family during the Move
Usually a family asking this question is already experiencing major financial difficulties. This may be putting immense pressure on both parents and the children. If you allow your home to go to foreclosure, you move and leave it vacant or you stay waiting for an official to knock on your door demanding you move. That added burden can cause even more stress for a family. In the short sale process, you work with the bank and pre-determine the day you will move. The new purchasers usually move in the same day. Your family moves with a plan and you don’t leave the neighborhood with a vacant house to deal with. There is a level of dignity in this type of move that does not always take place in a foreclosure situation.
For several reasons, a short sale may be the better option for your family. It is best to get professional advice if faced with this decision.