The COVID-19 or coronavirus update is having a major impact on the world economy. If the current projections are taken into account, the coronavirus and its accompanying economic disruptions could cause the loss of as many as 5 million American jobs. The nation’s economy could also shrink by as much as $1.5 trillion with a recession almost guaranteed. Economic forecasters claim that it could be as bad or worse than the 2008 global financial crisis.
It is understandable that many American borrowers will find that they cannot keep up with their mortgage payments or other debts. While many mortgage holders are instituting programs to remove late fees or provide late payment forgiveness over the next several months, at some point in the future these obligations must be paid.
The increasing number of out-of-work individuals and those whose small businesses have succumbed to economic stress means that there will eventually be more foreclosures and short sales in the United States.
David Stanger of Westmarq Real Estate Group, a residential real estate firm, explains the difference between a short sale and a foreclosure and how these difficult financial decisions can help the average American family get back on its feet in these challenging economic times.
Short Sales Versus Foreclosures
When a family is “underwater” on their mortgage or owes more than the property is worth, or when the family cannot afford to pay the principal and interest on their home loan, they may want to consider short-selling their property or foreclosing on their home. These two methods have similarities but also have important differences.
A short sale occurs when the homeowner essentially asks the mortgage lender to accept a lesser amount on the mortgage than the total amount of money owed. For example, if the homeowner sells a home for $400,000 but the mortgage is for $500,000, the seller is short by $100,000. Should the lender accept the terms, the debt will be settled and the borrower will be released from further liability.
One thing that a borrower short-selling a home must keep in mind is that there may be a “deficiency judgment”. In this situation, the mortgage lender tries to recover the “deficiency” (the money it lost by short selling the home) by getting a court order. This will place a lien on the borrower to produce more money. Some states do outlaw this practice, but you should look into the state rules and regulations before you consider a short sale.
Foreclosures differ from short sales in that the mortgage holder stops making payments on the property. After three to six missed payments, the lender will produce a Notice of Default with the county. After the borrower receives this notice, they can attempt to settle the debt through a short sale or by paying the entire balance of the mortgage owed. This situation is called “pre-foreclosure”.
Another way to possibly avoid foreclosure is to ask for a deed in lieu of foreclosure. In this situation, the homeowner willingly transfers the ownership or title of the property to the lender and walks away free and clear.
If no provisions are made, the bank or lender will be forced to foreclose on the property. When the property is foreclosed upon, the former owners must be evicted. They must move out of the home so that the lender can auction it to the public.
Foreclosure auctions are advertised in newspapers. They are held either at the property or at a courthouse. If the home is not sold at auction, the home will be known as a bank owned or REO property.
Impact on Credit Ratings
Both foreclosures and short sales can have serious impacts on your credit report, but a short sale is generally less damaging. A short sale can take as many as 160 points away from your credit score. Foreclosure could drop your credit score even further.
Your credit score after a foreclosure or short sale will depend in large part upon your credit rating and debt utilization rating before the event.
Selling a Home Under Difficult Circumstances
David Stanger understands the deep and serious impact of COVID-19 on the world economy. No one likes to think that they will soon be put in a position where they cannot afford to keep their home, but unfortunately, this economic reality is becoming clear to many people across the United States as wages and hours are shrinking. Even salaried employees may find that they do not have enough paid time off to keep their jobs if they become ill with the virus.
Small business owners and laid-off employees will find themselves struggling to make ends meet and will not be able to pay their mortgages. Short sales and foreclosures are two strategies that may help a homeowner move forward and start a new financial future.