Short Sale vs. Fore-closure

Should You Short Sale or File Foreclosure

Your mortgage is about default due to slow payments. The question comes up as to what makes better financial sense; a short sale or fore-closure on the property. If

you have the ability and the lender and all the other lien holders agree, a short sale (paying less than one owes to the lien holders) might make more sense. If the lenders do not agree, foreclosure may be inevitable and your only choice. Both, the short sale and the fore-closure will have a negative impact on your credit scores.

Getting Short Sale Approval

Another requirement is that one MUST have the approval of the lien holders legal department and you MUST show good reason for the request to short sale the loan. Legitimate, valid reasons include disastrous medical issues (death of the primary borrower) that have caused the deficiency, mass lay-offs in a given geographical area and extreme unusual circumstances way outside the norm (i.e.: weather that has devastated the entire area, earthquakes that have completely destroyed the area where the property is located).

Just because one of these circumstances has occurred does not excuse, negate or hold harmless the borrower from the debt. The fact is the lender provided funds for the PURCHASE of the home… not the home itself. This is one reason many insurers are suggesting flood insurance for most properties. If one looks at the devestation caused by the flooding in the mid-west in recent years, one can quickly see why flood insurance is now more the norm as opposed to the exception.

With the involvement of FEMA, many homeowners have been provided short term loans regardless of credit to be made whole, in a sense, so they do not fall behind on their loans and for many, they have been able to re-build, sell or relocate without the negative impact on credit or the devestating effects the occurrence caused in the first place. Most lenders will readily accept these payments, even if they had to wait for the payments from FEMA, rather than re-victimize an otherwise solid borrower who, through no fault of his own, found himself in these unfortunate circumstances.

Another financial vehicle that has become very popular is medical savings accounts. People who have these accounts are already prepared to make payments on what could be very expensive treatment and some insurance policies provide very large face amounts to reduce the potential financial ruin due to catastrophic illnesses.

Foclosure

Financial irresponsibility, poor decision making, failure to replace income due to firing are all examples of why a lender would refuse a short sale. I saw a sign recently that read “Poor planning on your part does not constitute an emergency on my part”. In this context, that means, if one makes the ill-advised decision to engage in activities that entail a huge amount of financial risk and loses his money or one engages in illegal activities NO lender will approve a short sale.

An example of an illegal activity would be any activity that violates the RICO Act. For quite some time, the safest haven to hide ill gotten gains was in real estate because it was very difficult for law enforcement to seize a property. RICO changed all that. If it is found out that ill gotten gains were used to purchase and as a result “hide” these monies vis a vis the real estate owned, the lender will not grant approval to the short sale and under the RICO Act will immediately institute foreclosure proceedings.

After the fore-closure is completed and in conjunction with  law enforcement, the property becomes the property of the government. The house and the contents, at this point become the property of the government and are subject to auction or sale.

Consult With An Attorney Before Foreclosure

Please note: ONE MUST CONSULT WITH AN ATTORNEY TO FILE THE PAPERWORK FOR APPROVAL OF A SHORT SALE. My recommendation also is that if  fore-closure is inevitable, consulting with an attorney is highly recommended. If you have read my previous articles, the reasons are clear.

If a short sale is granted, one will also need to understand that it will be very difficult to obtain a loan for at least three years under FNMA or FHA guidelines. One needs to consult with the lenders to find what all of their guidelines are in qualifying for a new loan.

Some lenders do not have every program available. In other words mortgage company A may not have the programs that mortgage company B does. It will require some checking and some phone calls/emails to find out. I cannot stress the importance of the borrower performing his due diligence in looking into qualifying for a loan after a fore-closure or a short sale.

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