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Chapter 3: Pros and Cons of Short Sales (full)

Homeowners should decide if a shortsale is the best choiceCurrently, many homeowners are looking for a way out of dealing with underwater or upside down mortgages. Since home values have dipped so drastically in the past few years, many sellers do not have the equity in a piece of property to afford to sell the home at market value. Others simply face financial difficulties and cannot afford to keep paying the mortgage, leading them to look for another option rather than foreclosure.

Short sale transactions can provide an excellent alternative to foreclosure to many homeowners. However, this option is not the best choice for everyone. Any homeowner should take the time to consider both the pros and cons of this process before making the choice to go this route. The following is a look at both the pros and cons of a short sale, which can help homeowners decide if a shortsale is the best choice for their particular needs.

The Pros of Short Sales for Homeowners

A short sale can bring certain benefits. The following are a few of the pros that homeowners can enjoy when deciding to go through the short sale process.

Pro #1: Less of an Impact on the Homeowner’s Credit

One of the pros shortsales have to offer homeowners is that they have less of an impact on the homeowner’s credit score and credit report. While this transaction will definitely have a negative influence a seller’s credit, it is a slightly less damaging than going through a foreclosure. In most cases, these transactions are reported as “settled debt” and this reporting has a less severe impact than a foreclosure would.

Pro #2: Purchase a New Home Faster

Another pro that makes a short sale a good choice for homeowners is the benefit of being able to purchase a new home faster when choosing this route. Fannie Mae guidelines allow individuals to purchase another home in just two years. In some circumstances, if there are no late payments more than 30 days late, consumers may be eligible to purchase a home right away, although it may not be easy to actually do so.

Pro #3: Enjoy Faster Credit Recovery

Although a homeowner’s credit will no doubt be negatively affected by a short sale, most consumers will find that they can enjoy faster credit recovery when choosing this route over foreclosure. Short sales do not affect an individual’s credit for as long as a foreclosure can, making it possible for homeowners to get their credit score up faster. For consumers that want to purchase a home in the future, this is especially important, since lending criteria are so strict today.

Pro #4: May Not Owe Anymore

In many cases, homeowners enjoy the benefit of not owing any more money after the short sale is complete. Sellers have the option to ask the bank to cancel the rest of the debt that remains unpaid after the sale takes place. While this does not happen all the time, it does happen in many cases and can be a huge relief to sellers that are under a huge financial burden.

Pro #5: Avoid the Frustration of Foreclosure

Last, the short sale option makes a good choice for many homeowners because it allows them to avoid all the frustration of going through a foreclosure. Going through a foreclosure can be stressful and difficult, especially since it can take six to twelve months for the entire process to be completed. Although a shortsale can be a lengthen process in some cases, it is often less frustrating than going through a foreclosure, especially for families.

The Cons of Short Sales for Homeowners

There are some drawbacks for homeowners in short salesShort sale proceedings come with some drawbacks to consider as well. Consider the following cons before deciding to go this route.

Con #1: Credit Damage Still Occurs

Although homeowners may find a short sale to be less damaging to credit than a foreclosure, credit damage still occurs with this option. A shortsale is generally documented on your credit, although it does not have the same impact as a foreclosure would. Going this route will still make it more difficult to get credit in the future until measures are taken to rebuild your credit.

Con #2: Proof of Hardship Must Be Shown

Another con of the short sale route is that sellers must be able to show proof of hardship. The proof needed can require quite a bit of paperwork and involves allowing the lender to examine various personal records, including assets and liabilities, bank accounts, tax returns, pay stubs and more. Some of the common hardships that are accepted by many lenders include job loss, divorce and prolonged illness.

Con #3: Short Sales Can Take Time

Unlike their name, these transactions are often anything but short, which can be another drawback for homeowners. The process requires significant paperwork and several steps, which can take some time. Since many individuals are seeking this route right now, the process is often a bit backlogged with lenders. Carefully compiling important paperwork and submitting forms on time can help sellers navigate this process more quickly.

Con #4: Short Sales are Not Always Accepted

Lenders do not always accept short sale transactions, which homeowners must keep in mind when considering this route. Although more lenders are becoming willing to go through with shortsales because they have realized they often save money this way, lenders are not required to approve these sales. It is possible that a homeowner’s request to go through with a short sale will be denied.

Con #5: Lenders May Still Require Payment on the Amount Still Owed

Even if lenders do permit a short sale to go forward, once the sale is complete, the lender may still require payment on the amount that is still owed on the home mortgage. The leftover debt does not have to be forgiven by the bank. They can ask homeowners to pay back the difference between what is owed and the sale price. While this is a possibility, in many cases it is possible for sellers to negotiate with lenders to have the rest of the debt forgiven.

While short sales come with both pros and cons and there are no guarantees that the bank will approve the transaction or forgive the leftover owed debt, most homeowners choose this option because they believe it still offers a better alternative to foreclosure. Of course, every individual situation is unique.

While it may appear that the pros outweigh the cons, homeowners may want to consult with professionals before deciding whether a short sale is indeed the best option or whether they should allow the home to go into foreclosure.

Next: Chapter 4: Why short sales are a viable option for lenders

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