Foreclosures are not an end-all for those experiencing this unfortunate situation.  Here are some common myths regarding foreclosure:

• Bankruptcy is worse than Foreclosure – There are many people that may think that bankruptcy is worse than foreclosure.  Although with a bankruptcy, you can re-establish yourself within 12 months but on the other hand foreclosures will stay on your credit report for 7 long years.
• Deed in-lieu of Foreclosure – This will only have an effect on your credit report as this is a type of “settlement” on a mortgage.  In most cases, the property is still taken from the borrower, but their credit score is not hurt as much as with a foreclosure.
• Bankruptcy helps you avoid Foreclosure – Actually that isn’t right – it’s the opposite.  Bankruptcy will not help you avoid the foreclosure process.  If you do file for bankruptcy, the lender will get by with the help of automatic stay.  If the stay is granted, then the lender will attempt to complete the procedure of foreclosure and take the property ASAP.

Don’t give up if you are facing foreclosure.  There is a lot of information out there and banks want nothing more than for you to stay in the home and work out a deal.

1. Reinstatement of the loan.  This means you bring the loan current by paying all the payments, legal fees, late charges and other fees.

2. Payoff the loan in full.   It may not be a realistic option for many, but it is an option.

3. Deed-in-Lieu of foreclosure.  This means that you hand over the property to the bank.  The bank may not be interested in this one unless the property is worth more than what you currently owe.  The advice of a foreclosure attorney would be a great idea to check in with on this idea.

4. Sell the property.  If your home is worth more than what you owe the bank, then this can be a good option.  If your house is not worth more than what you owe, then you might be able to get the bank to agree to a short sale.  In a short sale, the bank agrees to take less money than what is owed.  If you want to stop foreclosure using this option, you will need to make sure you have a good realtor that understands and knows the short sale process.

5.  File bankruptcy.  A Chapter 13 bankruptcy is basically a reorganization of your debts.  It can temporarily stop foreclosure and can typically involve setting up a 3 to 5 year plan to repay lenders.  This can be a good option if you are having problems meeting all of your debts.  You will need to advice and service of a bankruptcy attorney with this option.

6. Renegotiate with the lender. This is one option before foreclosure.  Most banks will try to work with you and allow the bank to negotiate putting the loan bank in service.  It could mean reducing payments, forbearance (temporarily stop making payments) or modifying loan terms.

Try not to rule anything out if you are going through foreclosure.  Use your judgment and contact a professional to help with your next steps.

A short sale involves offering the home for sale via a MLS listing.  Potential home buyers will make appointments to view the home, some will try to make lowball offers, agents may hold open houses to get a buyer.

The basics:

Short sales will happen when a lender agrees to accept less than the amount owed against the home because there is not enough equity to sell or pay all the costs for the sale.  Not all lenders will negotiate a short sale, and that is why a real estate agent or lawayer can help you in contacting the lender’s loss mitigation department to find out.  It will be no surprise, that the lenders will look at other cash assets, the lender may want to tap into those accounts.

How is the seller’s credit affected?

Foreclosures or Deed-in-Lieu of foreclosure affect the credit the same.  Sellers will take a hit of 200 to 300 points, depending on overall condition of credit.  If the seller’s FICO score is 680, then it could dip as low as 380.

Short sales will show up on a credit card, just like a foreclosure.  The ding on credit will show up as pre-foreclosure status.  A short sale hit could be less, but it will still damage your credit.

Waiting Period to Buy another Home

Foreclosures or Deed-in-Lieu of Foreclosure may end up waiting for about 24 to 72 months before a lender will offer any kind of interest rate that will make sense.

Short sales can wait a shorter time.

Short Sale and Foreclosure Deficiency Judgment:

The bad news is a seller could be subject to a deficiency judgment for the difference between the loan amount and the amount paid.  In California, purchase money  loans are not subject to deficiency judgments; however, hard money loans, equity loans and refinances are.

If you are a seller trying to decide whether to let a home go through foreclosure versus attempting a short sale, salvaging your credit may not be an advantage to doing a short sale.  The big advantage is that you’ll be able to buy a home sooner via a short sale versus foreclosures.  But you should seek legal and tax advice before making that decision.