What options do you have when it is obvious that you will lose the house to foreclosure? The choice you choose can significantly affect your future. Many times the homeowner does not adequately research what options they have or understand the consequences of the option on their future life as ruled by their credit.
* Deed in lieu: Sometimes this is called by other names, such as "cash for keys". It is simply making an arrangement with the bank to give them the deed to the house instead of them taking it to the foreclosure auction. This is less costly to the bank than the foreclosure action. Sometimes the bank will give you cash for the deed. But only $500 to $1,000 is given. This has to be done early, usually before the "notice of default". In this market, the bank may not be as agreeable to accept a deed in lieu because they will still have the house as an REO. (Or, real estate owned) The credit consequence is the same as a foreclosure.
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* Foreclosure: The foreclosure is when the property has been auctioned by the county where the deed is filed. In some states this is an auction on the courthouse steps, in others it is called the sheriff sale. That is when the property has been foreclosed upon. Everything such as notices, court hearings (in judicial states), and sending the file to the attorney are all during pre foreclosure, and are not the final foreclosure. The foreclosure can still be avoided. The credit consequences are long lasting.
* Bankruptcy: There are two types of bankruptcy. One type is a Chapter 13. With a Chapter 13 all of your debt is reorganized. A trustee of the court makes your payments to unsecured debtors who responded to the court. Sometimes the real estate is included in the payment plan, and sometimes it remains outside. Most of the time your outgoing payments in total are higher than they previously were. If you default on your payments with the trustee, you can be dismissed from the program. And if you default on payments on your mortgage you are in the same place your were. A chapter 13 stays on your credit for 7 years even if all obligations are paid in full before that.
The second type of bankruptcy is Chapter 7. With a Chapter 7 most unsecured debt is not paid back. Secured debt is usually not paid until the bankruptcy is over, but then the payments start again, with a higher payment because of accrued interest. This type of bankruptcy stays on your credit for 10 years.
Bankruptcy is not the panacea many people think it is, and laws are stricter on who qualifies for a bankruptcy. Be sure to research thoroughly before deciding on a bankruptcy do not just depend on the word of someone who is taking your money.
* Short Sale: A short sale can take place when the amount that is owed to the bank is higher than the current fair market value. Most lenders require the homeowner to be behind on the mortgage payments. Many lenders will suggest to the homeowner that they pursue a short sale to sell their home. Most times the homeowner will seek out a real estate agent. This seems to be the logical choice, but often real estate agents do not want to do the short sale negotiating, or do not know how. It is important that you get someone who knows how to deal with the banks. The negotiator gets the bank to accept a price lower than the amount owed. It can sometimes be complicated, and take a period of time anywhere between 1 month to a year. The time has a lot to do with the efficiency of the bank. A short sale should not cost you anything. The bank pays the commissions. A short sale only affects your credit for as long as the late payments are being added up. After the short sale, and your indebtedness is reduced, and other payments are on time, your credit improves.
The following chart shows the FHA ruling on how long before a person needs to wait before they can buy another property.
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5 years before bank financing 5 years 2 years before bank financing but stays on credit for 7 to 10 years. Here is a synopsis from a firm that measures the generic consumer's credit score for risk. This gives a very good argument for a short sale.
Sarah Davies, vice president of Vantage Score, says restructuring plans on a mortgage, whether in the form of a forbearance, modification or short sale, have a relatively insignificant effect on the consumer's credit score. The credit score can increase because the total amount of debt owed is reduced, and the borrower becomes inherently more reliable. However a foreclosure for someone with good credit can decrease the score by 140 points. Bankruptcy for someone in good credit standing results in a reduction of 365 points, and a mark on the credit file for seven to 10 years.
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