With homeowners in the United States and elsewhere continuing to struggle to pay their mortgages, some believe that foreclosure is their only option.
With homeowners in the United States and elsewhere continuing to struggle to pay their mortgages, some believe that foreclosure is their only option. However, because of the distressed housing market that has existed since 2007, short sales have become considerably more prevalent.
Although the short sale is by no means a painless option, it is most often a better choice than foreclosure.
REALTORS and lenders have criticized short sales in the past, but statistics show that short sales are now much more common. Lender Processing Services reported that in January 2012, the number of short sales made up 23.9 percent of all home purchases compared with 19.7 for sales of homes that had been sold through foreclosure. Moreover, lenders have become more inclined to accept short sales because of lower costs. The Federal Housing Finance Agency (FHFA) has taken steps to streamline the short-sale process and to make it easier for homeowners to avoid foreclosures.
Most know that the U.S. housing market has struggled since 2007. In 2006, a total of 268,532 households lost their homes in 2006. One year later, that total increased to 405,000, marking a 75% increase. Foreclosure filings also increased dramatically in 2007, as there were more than 2.2 million filings of default notices, auction sale notices, and bank repossessions.
In the years preceding 2007, homeowners in the United States had enjoyed a rapid increase in their housing prices. Thanks to this “housing bubble,” many homeowners could handle not only principal mortgages but also second mortgages on their homes because the property values remained not only high but were also increasing steadily. When housing prices took a nosedive starting at the end of 2007, homeowners lost equity in their homes, and in many cases, the principal on the mortgages ended up being higher than the market value of the homes. This was often the case with those who took out home equity lines of credit, especially for those homeowners who borrowed against the full value of their homes.
The bursting of the housing bubble helped to cause the Great Recession of the 2000s. In turn, the recession caused many to lose their jobs, making it difficult for the newly unemployed to pay their mortgages. Still others struggled with other life events, such as illnesses, family deaths, and so forth. The result was that foreclosures increased by record numbers in 2008, 2009, and 2010.
The foreclosure process ends with a lender taking possession of a home and selling the home at an auction. The homeowner will receive a notice to vacate the home, and the homeowner is not involved in the sale process. The foreclosure remains on the homeowner’s credit report for at least seven days, and lenders in many states can obtain a judgment against the homeowner for the difference between the amount gained at the auction sale and the amount remaining on the mortgage.
The short sale differs in that the buyer negotiates with the lender so that the lender will accept a payoff amount of less than the remaining amount owed. Thus, the sale is “short” of the total amount remaining on the mortgage. The homeowner remains in control of the sale and will not be forcibly evicted from the home as is the case with someone whose home is sold at auction through foreclosure. The homeowner can negotiate terms of the short sale with the lender, and lenders usually do not report short sales on credit reports in the same manner that lenders report foreclosures. Nevertheless, short sales usually have a negative impact on credit ratings, often causing FICO scores to drop by more than 100 points.
Both foreclosures and short sales take significant lengths of time to complete, though the short sale is usually less costly and less cumbersome for the lender. The former homeowner under either circumstance will have to wait several years before buying another home through a mortgage, though the time is considerably less in the case of a short sale. In most instances, a homeowner must wait about two to three years to buy a home after a short sale compared with a waiting time of five to seven years for those who have gone through a foreclosure.
Although there are drawbacks to the short sale, the problems associated with foreclosures are usually greater. With new FHFA regulations in place, lenders will be required to respond to requests for short sales sooner and will be required to communicate decisions to borrowers more quickly. These regulations have been designed to streamline the process, which should make short sales even more beneficial compared with foreclosures.