Many want to realize their dream of owning a home. It takes some effort too. You must save and have a good credit score. While hoping for the best, issues of life may hinder your dreams. Sometimes you lose your job or fall sick, plunging yourself into more debt.
California residents have a little glimpse of light regarding home loan issues. But lenders can take action against mortgage defaulters. In that case, what options do you have as a homeowner?
If you default on a mortgage payment, you can opt for foreclosure or short sale. Though you may lose your home during the process, the consequences differ. So, read our analysis on foreclosure vs. short sale in California.
Understanding Short Sales
If you sell your house for a value that is less than your loan debt, the transaction is a short sale. Before you engage in a short sale, you must get your mortgage lender’s approval.
A short sale can cause your lender, typically a bank, to lose money. So, they must see the reasons why it makes sense.
What Qualifies You for a Short Sale?
You must show evidence of financial hardship to qualify for a short sale, and your documents should spell cases like job loss, ill health, or natural disaster, to name a few. Make sure that your lender accepts these reasons. Otherwise, you can’t proceed with a short sale.
In addition, you must provide your lender with the most recent selling prices of homes in your neighborhood. These are typically called comps, or comparable sales.
Your creditor will check your documents and real estate price data. If accepted, then you can sell your home under short sale. In this case, your lender might not recoup the full mortgage debt value.
How Does a Short Sale Affect Your Credit Score?
Your credit score will drop by 50 points if you repay your loan on time after completing your short sale transaction. If paying late, your credit score can drop by 200 points.
Borrowers with a low credit score of 700 and less pay higher rates. Likewise, those with higher credit scores enjoy lower rates and better chances of getting loans.
How Long Does It Take To Get a Mortgage Loan After a Short Sale?
After a short sale, it takes about two to four years to get another home loan. Your home worth also determines how soon you can secure a new loan.
For instance, if your creditors lost 20 percent of their loan amount, the next mortgage becomes available in two years. Meanwhile, it takes four years before a new loan for a 10 percent drop in debt value.
Foreclosures empower the lender to take over your home if you stop making payments. Since you used your home as collateral, whether it’s worth the debt, the bank can seize it.
Your creditor will notify you about the default 30 days after failing to repay. If you don’t attempt to pay, expect a foreclosure notice from your lender. Of course, that means you will lose your home.
How Does Foreclosure Affect Your Credit Score?
California has its procedures, consequences, and length of time for foreclosures. According to FICO, your credit score can drop up to 100 to 200 points, which means foreclosure has a more severe effect on your credit score than a short sale.
How Long Does It Take To Get a Mortgage Loan After a Foreclosure?
Besides taking an enormous toll on your credit score, you may wait for seven years before securing another home loan. Depending on why your income dropped, some financial institutions can give you a loan within a shorter period.
When applying for a new mortgage, inform your prospective lender that you already had a foreclosure.
With Foreclosure vs. Short Sale, Which Option Should You Take?
Homeowners in California enjoy certain rights that prevent lenders from coming against them in a full sweep. No matter how favorable the law is, it doesn’t take away the creditor’s power. So, let’s examine both foreclosure and short sale options to help you choose which is better.
When to Exit Your Property
Check your deed of trust for the power that allows lenders to come to your home. You can stay in your home for a while since it takes months before the court actions on your lender’s request.
You will get a notification from your bank on the date of the sale, and it takes 20 days from the date you received the notice. Your lender will also notify you after selling your house. At that time, get ready to leave your property within 3 to 45 days after getting the notice.
If your creditor files for a deficiency judgment, you can get your house again within one year. But the court order also mandates you to pay the difference between the outstanding debt and the sale price.
Redeeming Your House
If you have no way of getting your house back, go for a non-judicial foreclosure. Remember, only a deficiency judgment can make your home redeemable, and otherwise, you cannot reclaim it once the transaction window closes.
Know Your Type of Mortgage to Avoid Tax Implications
If you have a non-recourse loan, you shouldn’t pay a fine for the difference between the total debt and the sale amount. But you will pay tax for the same reasons in a recourse loan.
A Short Sale Is Faster
A short sale offers you the opportunity to sell your property for less than your mortgage. Remember to secure your lender’s approval to initiate a quick sale. As a positive, California laws mandate financial institutions to respond on time. So, typically you can complete the deal within six months.
No Deficiency Judgment Against Short Sales
In California, the law prevents financial institutions from getting deficiency orders against mortgage defaulters for the difference between the short sale amount and the debt owed. But expect your credit score to reduce after completing your transaction.