A sudden life or career change can make your previously affordable home a nightmare. If you’ve begun missing payments and are worried about the future, it is time to explore your options. In a situation where you can sell your home for more than your remaining loan, the option is simple – sell! However, in situations where you owe more than what the home is worth, many are left scratching their heads between opting for a short sale or foreclosure.

What is a Short Sale?

A short sale is when someone purchases your home for less than the value that is owed on the loan. An example would be if you owed $210,000 on your home, but the buyer only purchased the house for $200,000. This would leave $10,000 remaining on the loan. However, when a short sale occurs, it typically indicates to lenders that the seller is experiencing financial troubles. Depending upon the lender’s policy and your negotiating abilities, you may be able to convince the lender to drop this remaining $10,000. Primarily, this will be dependent on how much the lender stands to lose.

What is a Foreclosure?

A foreclosure is a legal process that occurs when a buyer defaults on their mortgage. Different states and lenders have different rules for the number of monthly payments that must be missed before the foreclosure process begins. Further, some states allow non-judicial foreclosures to occur, where more wiggle room can be negotiated to catch up on your debt may be found. However, Indiana requires lenders to process their foreclosures through the judicial system.

The process for a judicial foreclosure typically has a professional appraiser determine the fair market value of the property. The property is then set up for auction with this value in mind where the highest bid is taken. A risk that could lie in wait is if the court rules that deficiency judgments should be collected from the borrower. A deficiency judgment occurs when the auction offers less than the fair market value of the property, leaving the borrower to pay the difference.

For example, a worst-case scenario in a foreclosure could be owing $180,000 on a property mortgage, receiving a fair market value of the property rated at $170,000, and the lender only auctioning off the house off at $120,000. In this scenario, you would still owe $50,000 to make up the difference between the fair market value and what the property was auctioned off at.

Making Your Choice

With all this said, how do you decide between a foreclosure or a short sale? Well, it depends on your situation and market.

Short sales are typically a better option if you think your property will not do well at auction. Some factors that can contribute to a poor auction are:

• The market is cold. If many properties in your area have been on the market for more than 50 days, then it is likely you are in a cold market.
• Your property needs repairs or is currently under repair.
• The property is awkward, outdated, or generally of low desire.
• The property is surrounded by other low value homes.
• The property is exorbitantly expensive for the area.

In contrast, foreclosures can be a better option if you believe your property will perform well at auction. Some signs that your property will perform well are:

• The market is hot. If you see many properties in your area disappear the day they are posted, you are likely in a hot market. However, keep in mind that this will be rare if you owe more on the home than what it is worth.
• Your home is up to date with technology, appliances, and current trends.
• You are in a highly desired neighborhood.
• The property is surrounded by well-maintained, high-valued homes.
• The property is considerably inexpensive for the area.

Even in best-case scenarios for foreclosures, you are still opening yourself up to unnecessary risks and damages. Keep in mind that nothing is guaranteed in a foreclosure and that if the property happens to auction for much more than what you owe on the loan, the excess funds will go to the lender instead of you. Finally, foreclosures will give you a severe hit to your credit rating, and make moving to a new home difficult or impossible. For these reasons, it is generally recommended to seek out short sales before exposing yourself to the risks of a foreclosure.

If you hope to avoid the pitfalls of foreclosure or short sale, reach out to WCC Properties to explore your options. WCC will always give the best price for your home no matter what its condition or location!