Foreclosure rates declined in July, according to the S&P/Experian Consumer Credit Default Indices. Still, there’s no denying that mortgage defaults are alarmingly high.
Two options to consider when you cannot afford your mortgage.
If you’re in the position of not being able to afford your mortgage, you may wonder what your options are. Refinancing your home can be a good option, but it’s not always possible for everyone. Two others you may have heard about are foreclosure and short sale. You might be unsure of the difference between short sale and foreclosure, or how both can affect your credit.
What is Foreclosure?
Simply put, when homeowners can’t afford to repay the money they borrowed to buy their house, the bank is legally entitled to take possession of their home. Foreclosure can be devastating, both emotionally and financially. Its impact on your credit is significant and long term.
Foreclosures haven’t really been that great for banks either during the recession. It costs them time and money to foreclose, and often a bank may not be able to recoup its losses on the sale of foreclosed property.
Avoiding foreclosure benefits practically everyone, and that fact may be why alternatives like short sales are gaining in popularity.
What is a Short Sale?
According to the National Association of Realtors, a short sale is when a lender agrees to accept less for a property than the amount owed on the mortgage by the current homeowner. The lender can either forgive the difference between the sale price and the amount owed, or can arrange with the homeowner to settle the remainder of the debt.
It costs the bank less to agree to a short sale than to foreclose, so the option has become increasingly popular for both lenders and homeowners facing foreclosure.
While a short sale can help you avoid the significant credit impact of foreclosure, and possibly stave off bankruptcy, it will still have an adverse impact on your credit report. It’s rare for lenders to forgive the remaining amount on a short sale, and that means they’ll report the short sale as “settled.” Settled accounts negatively affect your credit because it means you repaid less than the debt you originally agreed to.
While the difference between short sale and foreclosure is clearly defined, both have a negative effect on your credit. A mortgage is one of the most significant and long-lasting financial commitments you can make. Falling short of fulfilling that commitment in any way can have serious, long-term consequences for your credit. Before you make any decision about short sale and foreclosure, be sure to consult with a trusted financial advisor for guidance.