The differences between a short sale and a foreclosure

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Dear Michael: Can you please explain the difference between a short sale and a foreclosure?

Answer: Losing a home to foreclosure due to an inability to keep up with monthly mortgage payments is one of life’s most unpleasant experiences. It is also an event that keeps on affecting a homeowner long after the home is gone by devastating the person’s credit score. Regrettably, most people cannot be 100% sure that they will remain safe from foreclosure because they can’t foresee the unexpected. Occurrences such as serious illness, a major accident, divorce or job loss can happen to anyone. So it’s a good idea to understand the available alternatives should the worst occur.

A short sale is a popular option for homeowners mired down with financial problems. In this case, the homeowner would sell the home for less than what the lender was owed. The biggest problem is getting a lender to agree to a short sale. In many situations, they will not. I advise pursuing this option immediately to everyone who realizes that they are falling behind in payments and most likely won’t be able to catch up. The longer one waits and the greater the amount is left unpaid, the less likely it becomes that a lender will even be willing to discuss a short sale. While a short sale will save someone from foreclosure, it will also have a negative effect on one’s credit score, frequently lowering it by as much as 150 points. This can be overcome more quickly than the black mark of a foreclosure, especially if one manages to retain one or two credit cards and keep them current. The inevitable result of a foreclosure is the lender taking the house. Not only will one lose the house, but the lender can get a judgment against the person for the arrearages owed plus the costs of the foreclosure action. If that isn’t enough, the homeowner’s credit report will be in terminal condition for seven to 10 years, worsening an already bad financial situation and making it very difficult to obtain any other kind of credit.

There is no upside to foreclosure. It should be avoided at all costs. On the other hand, a short sale is a popular option for homeowners mired down with financial problems. In this case, one would sell the home for less than what the lender is owed. The biggest problem is getting a lender to agree to a short sale. In many situations, they will not. I advise immediately pursuing this option to everyone who realizes that they are falling behind in payments and most likely won’t be able to catch up. The longer one waits and the greater the amount unpaid, the less likely that a lender will be willing to discuss a short sale.

Dear Michael: I want to buy a house but have no credit history. How can I establish good credit?

Answer: First, you need to save money for a down payment. In hindsight, one can now get a one-bedroom condo on the Westside for under $200,000. So if you can save 20% and maintain good credit and a steady income, you’ll qualify. Get a credit card and use it. Pay it off monthly. It won’t take that long to build up good credit, just pay everything on time, every time. You can look on Fannie Mae’s Web site. It has programs to help buyers with crediting for closing costs and more. Give yourself a year, if you have no credit whatsoever. Rent the cheapest place you can for the year and save everything you can for that down payment. Good luck.

Dear Michael: The bank is foreclosing on the apartment building where I reside. Should I still be paying rent while the landlord is in foreclosure?

Answer: This is not a matter of should. It is a matter of legal requirement. You have no choice. Your landlord has every right to demand the rent that he is legally required to receive. If you do not pay, then he can evict and sue you for it. His foreclosure legally has nothing to do with you as the tenant. The tenant is legally required to pay rent until the day the bank takes possession, and then the rent would be paid to the bank. A foreclosure does not void your lease. Tenants feel betrayed and want to get back at the owner in this type of situation but this will only put you in a much worse position. Banks are required to let tenants stay through the end of their lease or give them a 90-day notice. The landlord does not have to pay the mortgage with the rent. In fact, they are not legally required to pay it at all. I know it seems like the rent should go directly to the mortgage but it does not work that way. One has nothing to do with the other. A lease is a legally binding agreement to pay, but a mortgage is simply a loan.

Michael Kayem is a Realtor with Re/max/Execs serving Culver City and the Westside since 2001. Contact Michael with your questions at (310) 390-3337 or email him at homes@agentmichael.com.

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