There is Logic in Allowing for Short Sales and even Foreclosures

June 30th, 2009

In the present mood of the market when property values are rapidly falling there is logic in allowing for short sales or even foreclosures for sale. Both short sales agreement and foreclosures mean going away from the house without disposing of it in a traditional sale. In foreclosure the unit is taken by the bank because of default. A short sale happens when the owner realizes that the house cannot be kept any longer irrespective of missed payments.

For instance a borrower finds that to clear a mortgage he has to pay $200,000. A buyer is found who is willing to pay $1, 80,000 and the bank agrees to the sale. The bank agrees because otherwise it would have had to incur more expenses in following the course of foreclosure. Thus when the value of property in the locality decreases with the passage of time it is prudent to sell at loss rather than suffer more loss by hanging on to it. In this way money is saved in the long-term. In other words it is accepting the fact that the purchasing of the house has been a bad investment and to cut further losses it is best to dispose of it to the buyer giving the nearest offer.

Short sales and foreclosures are laced with long-term implications that will affect many facets of life of the borrower for years to come. Foreclosures will pull down the FICO score by more than 100 points said Barry Paperno of Fair Isaac. In the case of short sale the FICO score will also drop if the sale amount is noted to be less than the loan amount. The fall in score may seem negligible but it would be enough cause for credit companies to impose hikes in rates and credit limits. Insurance companies will increase premiums without delay.

In the world of credit scores the main difference between the two modes – short sales and foreclosure is that of name. To future lenders a short sale does not look too bad when compared to the tag of foreclosure. It indicates that the borrower took action before the bank stepped in to take over the property. But in any case the financial report is negative. This will stay with the person concerned for long seven years – at the least.

The question is – how long does one have to wait after a short sale before getting a loan to buy another house? It varies from one lender to another.