While a home with a white picket fence may be the American dream, in reality, one in 200 American households will be forced into foreclosure. Yet there may be a way to save your credit score and sell your home for less than a market value-the short sale.
A large amount of debt and no emergency plan is the norm for many Americans. In fact, 43 percent of Americans are spending more than they earn each year and 42 per cent of Americans don’t have enough cash flow to support themselves for 90 days in the case of a sudden inability to work.1 This combination can often result in many families losing their homes each year.
Choosing a variable rate mortgage can also lead to an unexpected spike in your monthly mortgage payment with the rise in interest rates. Those who buy when the market is high can find themselves in a home that’s worth much less when the demand grows soft. This combination can result in a mortgage that’s higher than the home’s worth and the need to sell.
The Benefit of a Short Sale
A short sale is the sale of a home where the mortgage lender agrees to sell the house for less than the amount owed on the mortgage.2 While many falsely believe that this type of sale is only offered by lenders on the sale of foreclosed properties, homeowners actually initiate a short transaction to avoid a foreclosure.
Foreclosure vs a Short Sale
There are benefits and drawbacks to making a short sale for both the lender and the property owner.
Both options will negatively impact your credit score. Here is a breakdown on how a disruption in your mortgage payments will affect your FICO score.
30 days late: 40 to 110 points
90 days late: 70 to 135 points
Foreclosure, short sale, or deed-in-lieu: 85 to 160 points
Bankruptcy: 130 to 240 points
While some lenders may consider a short sale even if your payments are current, not all lenders will consider this their best option. They’re not interested in losing money on the sale of your home. Lenders will also look at all your financial assets that could be liquidated before making their decision.