Foreclosure, short sale, loan modification, why are all of these terms becoming so common, and what do they mean to an individual home owner?

Real estate values have decreased 50 percent or more in some places from their 2006 peak and unemployment in states such as California is well into the double digits. Across the country, more than a third of mortgage holders owe more than their houses are worth. More than an eigth of all mortgages are behind on their payments or in default on a nationwide level.

If you are in danger of defaulting on your loan, you have only a handful of avenues to go: a short sale, loan modification or a foreclosure. The pressure these days is toward short sales, because they offer a benefit to Realtors, agents, lenders and buyers. The question then becomes, is a short sale truly your best option as a consumer?

Generally, it really is not the best option to pursue, although those working with you in the process may want you to think it is.

Why might this be? Let’s take a look. The first question is what to do when you realize you can no longer pay your home loan. What happens should you suddenly stop paying?

First, it will really hammer your credit score. That score is crucial to future lenders who might decide at some later point just how good a risk you are, and may mean you have to turn to hard money lenders down the road. Additionally, your credit score is also being used by employers who may be making a decision on whether or not to hire you. Ruining your credit is not something to rush headlong into.

Your credit score is figured using outdated and proprietary formulas using information collected throughout your life as a borrower. According to the credit bureaus, these scoring systems are meant to give an indicator of how likely you, as a borrower, are to default on a loan during the first two years it is out.

There are a number of companies other than the big three that have their own scoring models, most running numbers between 400 and 990. If you stop making payments on all of your loans, most of these formulas will drop your score below the 600 mark.

If you have a credit score of less than 600 in today’s market, getting a loan of any type can be very difficult (except for the more expensive money offered through private hard money
). If you are concerned about loans for the future, doing a short sale of your home will not keep your credit in pristine shape, contrary to what many in various industries might tell you. So are there any benefits to short selling your house instead of walking away?

The biggest benefit is getting the debt you owe forgiven (be sure to read the fine print), and keeping your credit report foreclosure free. A short sale likely will impact your score about the same as a foreclosure, but by going through the short sale rather than a foreclosure, you will be able to get another real estate loan in about 2 years time, rather than 3 or more with a foreclosure.

A potentially better option to consider is loan modification
. This can be a tough process to work through, but if you need to stay in your home and save your credit, a loan modification may be the best option to consider.

You need to be sure to do your own research before you choose which course of action you are going to take. Also remember that different states have different laws and there will be different ramifications for the various options. Locate an honest real estate agent and/or real estate lawyer, make an appointment, and talk about all your options before you make a decision. Making this decision is a big deal, and it is important to surround yourselves with professionals who will help you make the best decision possible!