In 2009, according to the US Census Bureau, about 829,000 people moved for financial or employment related reasons. While the survey doesn’t say exactly who many people moved because they could no longer afford their homes, you can be assured that the number is tragically high. These days, more and more people are experiencing financial difficulties that can lead them to have to leave their homes.
If you’re in financial straits and aren’t sure what to do, you might be considering short selling your house. Before you try a short sale, though, you need to understand exactly what a short sale is, how it might affect your credit, and what other options may be available to you.
What is a short sale?
A short sale is when you sell your house “short” of the loan that you have taken out against it. If you own a house currently worth $200,000 but owe $225,000 on your mortgage, you may be able to sell your house and clear the debt for the $200,000. The bank or lien holder will simply absorb the cost of the short sale.
Short sales are becoming more common for a few reasons. For one thing, with the collapse of the housing market and plummeting home values, many homeowners find themselves underwater on their homes – owing more than their homes are worth. When they need to get out of the home, they can’t afford to pay off the balance of the loan by simply selling the house, so they opt for a short sale.
Also, many people are struggling on the edge of foreclosure. Banks can often get more money out of a short sale, especially if the value of the house isn’t too much short of the value of the loan, than they are to get out of a foreclosure.
How does it affect your credit?
According to the credit bureau Experian, the effects of a short sale are actually similar to those of a foreclosure when it comes to your credit. Many individuals think that a short sale is different credit-wise from a foreclosure, so they might try to get a short sale because of this.
However, Experian notes that short sales are very negative to your credit because the lender doesn’t mark your mortgage as paid when reporting to the credit bureaus. Instead, the lender reports that the account has been settled. This lets future lenders know that you failed to finish out the loan and instead paid off less than you owed, which is obviously bad news.
Even though a short sale might hurt your credit just as much as a foreclosure, there are some credit advantages. For one thing, with a short sale, things tend to move faster, which mean you can start getting your credit score back up more quickly. Also, lenders will often consider you for a new mortgage two years after you’ve completed a short sale, rather than the up to seven years you may have to wait before getting a new mortgage after a foreclosure.
Other Options to Consider
If you absolutely have to lose your home, a short sale is usually a better option than foreclosure – if you can work it out with your lender. However, there are some other options you might try:
- Ask for forbearance. Sometimes lenders will give you a little extra time to catch up on your payments if you give them a call. The key here is to call the lender as soon as you know you’re going to have a problem meeting mortgage payments. With forbearance, you may be able to avoid some of the late fees that might otherwise overburden your financial situation even more. It’s always worth calling your lender to ask!
- Set up a repayment plan. If you’ve only missed one or two payments, you may be able to set up a repayment plan with your lender so that you don’t have to make up those payments all at once. For instance, if you pay your lender $1200 per month on your mortgage, you might just add in a payment of $100 per month for the next twelve months to catch up on your mortgage.
- Try refinancing. There are many different reasons to refinance a home, and missing payments is one of them. If you have good equity in the home and if your lender agrees, you can sometimes roll the missed payments into your overall loan balance and then get a new payment schedule.
- Use some credit wisely. Some homeowners have success in getting low interest credit cards, which they can then use to cover some of their living expenses while catching up on the mortgage. If your mortgage lender is unwilling to work with you on a repayment plan or a refinance, using a low interest card for a while can be helpful. Just make sure that you are using the card wisely and only spending money on necessities until you get your finances back in order.
Daniela Baker is a social media advocate and blogger at CreditDonkey. While sometimes a short sale is unavoidable, it’s best to try to avoid one if at all possible. Don’t fall into the trap of seeing a short sale as a quick and easy way to get out of your home if you’re underwater on your loan. It can have long-term consequences for your credit that you should definitely consider first. If you get into credit trouble, consider contacting a reputable counseling organization such as the U.S. Cooperative Extension System.