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

Values of homes have fallen 20-50 percent or more in some places from their values at the peak of the market and unemployment in California is well into the double digits. Throughout the country, over one third of home owners owe more than their houses are worth. Better than one out of every eight home loans are delinquent in some respect, and there doesn’t seem to be an end in sight.

If you are in the position of defaulting on your mortgage, you have only a handful of avenues to go: a loan modification, a foreclosure or a short sale. Many professionals these days are advising a a short sale, due to the fact that they offer a benefit for buyers, lenders and real estate agents. The question then becomes, is a short sale truly your best option as a consumer?

Generally, a short sale is not really the best solution, although many involved in the process want you to think it is.

Let`s look at this in more detail. So you are struggling to make mortgage payments. What will happen if you quit making your payments?

First, it will really hammer your credit score. Your credit is a key point to future lenders who will decide at some later point just how good a risk you are, and could force you into working with hard money lenders if you should need a loan. Also, your credit score is also being used by employers who may be making a decision on whether or not to hire you. Deciding to move forward with an action that can ruin this score is something you really need to consider carefully.

Your credit score is created with old and proprietary formulas using information that has been compiled over time, encompassing your entire borrowing life. According to the credit bureaus, these scoring systems are meant to give an indication of how likely a particular person is to stop paying on a debt during the first two years of it’s lifetime.

There are a number of companies other than the big three that have their own scoring models, most running numbers between 500 and 900. If you stop making payments, most of the models will lower your score into the 600 range or lower

If your credit is in under 680 based on one of the major credit reporting agencies in today’s lending environment, finding a loan for any reason can be impossibly difficult (short of working with private hard money lenders
). When sitting down to make your decision on which way to go, short selling your home will not keep your credit in pristine shape, despite what many may want you to believe. So is there really a beneift to going through a short sale?

The main benefit is getting out from under the debt you currently owe, and keeping your credit report foreclosure free. A short sale 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 conventional home loan in as little as two years, as opposed to 3 or more with a foreclosure.

What you may want to consider is looking into loan modifications. this can often be a long process to work with the banks on, but if you need to stay in your house and save your credit, a loan modification may be a great avenue to look at.

You need to be sure to do your own research before deciding on what direction or option you are going to pursue. Also remember that different states have different laws and there will be different ramifications for the various options. Find an honest real estate professional and/or real estate lawyer, make an appointment, and discuss all your options before you make a decision. When making this decision, make sure you are comfortable with the direction you choose, good luck!