What's the Better Option?

Given the economic times in which we live, homeowners everywhere are facing difficult questions and limited options. More often than not, the chief concern for homeowners is what to do about their homes, especially when they owe more on it than they could ever expect to sell it for on the open market. Maybe because of recent job changes you can no longer afford your home. Perhaps you're a homeowner that simply fails to see the logic in continuing to pay for a home worth only a fraction of the outstanding mortgage.

It's also important to keep in mind the order of possible resolutions that lenders like to see. Most favorably would be 'Paid on Time, Paid in Full', then Loan Modification, then Short Sale, with Foreclosure being the last possible option. Because positive appraisals are required for loan modifications, homeowners with upside-down loans simply don't qualify. In fact, only 1 in 10 loan modifications ever succeed. So lenders prefer short sales because although they're losing money, they're not incurring additional expenses such as legal, eviction, court costs, insurance, repairs and rehab, utilities, and administrative costs that can easily reach into the thousands.

How Will it Affect Me?

Many homeowners in these situations come to the same realization - short sale vs. foreclosure. Usually only two questions make the difference in which option you choose. One, can I recover some of the money I put into the home? And Two, what will each option do to my credit report?

Regardless of which option you choose, you will NOT recover any of the money you have invested in your home prior to a short sale or foreclosure. In the case of a short sale, since the lender or lenders are already losing money, they will not allow the homeowner to 'cash out', or receive any sort of proceeds at closing. As a matter of fact, often times home owners will have to come to the closing table with minimal funds to cover expenses not usually covered in short sale transactions. In the case of foreclosure, lenders are incurring even more expenses in addition to the reduced proceeds that lower priced foreclosures usually sell for. There is no closing, but rather an eviction from the property usually handled by an REO specialist.

The next question most homeowners have is what effect will a short sale or foreclosure have on my credit rating? In the case of a short sale, homeowners can expect to spend approximately 2 years with a negative mark on their report. That's far less however than the 7 - 10 years that foreclosures can impact your credit score. Short sales show a willingness to resolve your debt rather than walking away from it, which a future lender will almost certainly want to see. As an anology, think 'late payment' vs. 'charge off'.