After the recent housing market meltdown, many home owners have found themselves underwater on their mortgages. Being underwater means that they owe more on their homes than the homes are worth, making it difficult to keep making mortgage payments. Knowing that you are paying significantly more for your home than what the home is worth feels like throwing money away and the majority of home owners will probably choose to get rid of the home instead of making payments for several more years. Having to abandon the home that you have created memories in can be very unpleasant for the whole family, but it is probably a better choice than throwing money out the window.
The problem with being underwater is that you practically have two choices that will get you out of this situation: you can either walk away from your home, in which case the lender will foreclose on it, or sell it for less than it was originally worth at a short sale. Both of these options have serious consequences, and there is no way around them, but you probably want to know which one is the better choice, which one will create less problems for you than the other.
Differences Between Walking Away and Doing a Short Sale
Several parts of your financial life will have to suffer as a consequence of both walking away from a home and doing a short sale. The most affected will be your credit score, and this is where doing a short sale seems to beat walking away from a home and having it go into foreclosure. With a short sale, the lender hopes to recuperate most of the amount that you owe him, and to avoid going through the lengthy and expensive process of foreclosing. Here are two main differences between walking away from a home and doing a short sale, and how they will affect you.
- Your credit score. Walking away from your home will result in foreclosure, which will have a large negative effect on your credit score. Foreclosures typically remain on a credit report for up to 7 years, making it next to impossible for you to take out another mortgage loan and buy a new home. Short sales will also be added to your credit report, but worded as “settled for less” or something similar. Lenders prefer to recover some of the debt by doing a short sale instead of foreclosure, which takes a long time and is expensive. Your credit score has less to suffer when doing a short sale and it will be easier to recover, in only a couple of years.
- Your ability to buy a new home. When walking away from your home, you can buy a new home after 5 years have passed, but with several restrictions, like making a larger down payment and paying a larger interest rate. After 7 years, the black spot on your credit report goes away and you are able to buy a new home without these restrictions, as long as everything else is in order. You can buy a new home right away after doing a short sale, as long as you haven’t missed any payments on your previous mortgage and the lender doesn’t require that you pay back the remaining amount. However, finding a lender that will give you a mortgage loan in this situation is very difficult.
Doing a short sale seems to be the better choice between the two, but there are many factors to take into consideration before you can decide. However, your credit score is probably the most important factor, so choosing to do a short sale over walking away from your home is probably the best option in most situations.