Just how is the average American supposed to make their way through the existing real estate market and foreclosure crisis?

Real estate values have slid fifty percent or more in some places from their highs set a few years ago and unemployment in various places around the country is getting into the double digits. Across the country, more than a third of individual homeowners owe more than their homes are worth. More than an eigth of all mortgages are behind on their payments or in default on a nationwide level.

If you are at the point of defaulting on your home loan, there are three basic options: a loan modification, a foreclosure or a short sale. The pressure these days is toward short sales, due to the fact that they offer an upside to Realtors, agents, lenders and buyers. The question then becomes, is a short sale truly your best option as a consumer?

Usually, it truly is not in your best interest, even though others working with you in the process might like you to think it is.

If we take a closer look, we can see the consequences to various actions. The first question is what to do when you realize you can no longer pay your home loan. What will happen if you quit making your payments?

Right off the bat, it will damage your credit. That score is a key point to lenders you may work with down the line who might decide at some later point if you are worthy of making a loan to, which might make you seek out hard money lenders down the road. Also, it’s also being used by potential landlords and employers. Ruining your credit is not something to rush headlong into.

The score itself is calculated through arcane and proprietary formulas using data collected from your entire credit history. A spokesman for Fair Issac Corp., which maintains the FICO scoring system, says its purpose is to predict how likely the borrower is to default during the first two years of a loan.

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 your credit is in under 680 based on one of the major credit reporting agencies in today’s market, getting a loan for any reason can be incredibly hard (short of working with private hard money
). If you are concerned about loans for the future, doing a short sale of your property will not keep your credit in pristine shape, despite what many in various industries might tell you. So what is the benefit of short selling your home?

The main benefit is getting out from under the debt you currently owe, and keeping your credit report foreclosure free. A short sale can impact your credit about the same as a foreclosure, but with a short sale, you will be eligible for another real estate loan in about two years or so, rather than 3 or more that a foreclosure will require.

A better option is to look at loan modification
. This can be a tough process to go through, but if you need to stay in your house and save your credit, a loan modification may be a better solution to consider.

Be sure to do your own due dilligence before you make a decision about which direction or option you are going to pursue. It will also matter in which state you live, as there will be different ramifications for the various options. Seek out a highly reccomended real estate professional 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!