People who buy homes want the best for themselves and their households. They may have spent years planning for a home purchase, and anticipating greater control over the conditions of their homes and outdoor space. Housing choices also affect lifestyles, as people often buy homes that connect them to appealing neighborhoods, or provide access to the right schools for their kids.
Few homeowners ever buy homes expecting to default on their mortgages. But sometimes a harsh economic downturn; a career disruption; or a major life event like illness or divorce can make it impossible to continue paying the mortgage- at least for now. When that happens in a housing market where prices have dipped rapidly, and the homeowner owes more than the home is worth, the prospect of a foreclosure may rear its ugly head. But there is an alternative – the short sale.
Short sales are better than foreclosure for several reasons
A key reason short sales are better than foreclosure is that they put more control in the homeowner’s hands. Control matters – it helps people plan for themselves and their households in ways that fit with their values. In a foreclosure, the lender takes control of the property and sells it –frequently by auction. In a short sale, the mortgagee contacts the lender and, once approved, it is the mortgagee who takes charge of the short sale process, in collaboration with the lender. This process involves a realtor –not an auctioneer.
While a lender is not obligated to agree to a short sale, there are many good reasons that lenders do agree. Short sales are better than foreclosures for lenders because lenders are more likely to see a higher proportion of their money back through short sales. According to an article in the Wall Street Journal, foreclosure sales typically yield 30% less than homes sold through an ordinary sale. In contrast, short sales typically yield only 10% less.
Another advantage for the homeowner in this process is that the short sale may lead to a better long term borrowing and homeownership future. Short sales are better than foreclosure in terms of their impacts on credit records. They can also improve the homeowner’s ability to purchase another home sooner when finances improve. A foreclosure stays on the mortgagee’s credit record for seven years. A short sale will impact the mortgagee’s credit score, but is described in the credit report as settled or paid. Even better –a borrower who has had a short sale in his or her past can borrow again as quickly as two years later.
Finally, government agencies from federal to city levels appreciate that a short sale is better than foreclosure for neighborhoods and for cities. Large numbers of foreclosures concentrated in a single neighborhood or district can send negative signals about that neighborhood, and can risk devaluing the properties of even those homeowners not in financial difficulty. For this reason, US agencies have taken steps to streamline the short sale process. New rules by the US Federal Housing Finance Agency in 2012 have made time frames and filing requirements much simpler and clearer –to the homeowner’s benefit. The borrower may also be eligible for financial help in relocating after a short sale, of up to $3,000.