There are many Orange County homeowners who are caught in today’s mortgage loan crisis. Home values have now dropped by 20% to 30% in some cases.  And there are a large number of highly leveraged loans with adjustable rate mortgages, which results in thousands of Orange County property owners having great difficulty keeping up with their mortgage payments, and unable to refinance or sell.  There is now a growing trend for homeowners who are caught in this mortgage loan crisis, to simply stop making their mortgage payments and walk away from their home and letting it go to foreclosure sale.  There is even a website company that focuses on this growing trend and charges clients $1,000 or more simply to tell them to let the home fall into foreclosure.  I think this is a big mistake.  A Short Sale is a far better solution, and more socially responsible choice compared to simply letting the property go back to the bank via foreclosure.  Let’s compare the two choices. 

First a few definitions.  In a Short Sale, the homeowner decides to the sell their home, and the sales price minus sales costs, are less then the current loan balances on the property.  In this scenario, the mortgage bank(s) must agree to forgive some of their debt in order for the  property to be sold and close escrow.   A Foreclosure is a legal process initiated by the mortgage bank(s) after several months of mortgage payments have been missed by the homeowner.  This Foreclosure process begins with a 90 day Notice of Default process, followed by a 3 week Notice of Trustee sale period.  At the end of this period, the home is sold via open outcry auction on the county courthouse steps to the highest bidder, or goes back to the bank unsold and becomes an REO property. 

The Short Sale is a much more dignified solution then a Foreclosure.  In a Short Sale, you list your home with a local Realtor (who has experience with short sales). As far as your neighbors and the public is concerned, it is a normal home sale, just like any other.   A Foreclosure on the other hand, usually winds up first as a vacant neglected bank owner REO home with a brown lawn, dead landscaping, and stacks of nwepapers on the driveway.  Then a REO Agent posts “Bank Owned Home” signs all around the neighborhood during the weekend for weeks in a row. In addition, Short Sales nominally sell for about 5% more then the corresponding resale of the bank REO.  A Short Sale transaction is better for the bank, the local real estate market, and even the homeowner.

The Short Sale is better for the homeowner for financial reasons as well.  A foreclosure will usually stay on ones credit report for up to 7 years, while according to mortgage industry experts, the newly  refurbished FHA loan will allow a prospective  buyer buy a home with 1 year after conducting a Short Sale. Also, industry experts in credit counseling state that a Short Sales are approximately 100 points less damaging to ones credit as compared to a Foreclosure sale.

Finally, a little know but huge advantages of a short sale as compared to a foreclosure is the following.  In Orange County, there are many homeowners who have a 2nd trust deed (TD) Home Equity Line of Credit (HELOC) loans. The majority of these loans are recourse loans, which in California, means that if the first mortgage were to foreclose, the 2nd TD HELOC loan is removed from the home, but is not wiped out at the foreclosure sale.  It then becomes a delinquent unsecured debt.  The 2nd TD HELOC lender then has no other choice but to go after the homeowner will all of the legal recourse available to them.  A Short Sale, on the other hand, allows the knowledgeable real estate agent to negotiate with both the 1st and 2nd mortgage holders, in order to divert some of the available sales proceeds to the 2nd HELOC lender, so that they will agree to wipe out the HELOC debt at the close of escrow with no recourse against the homeowner. 

If you have any questions about the Short Sale process, please feel free to call for our real estate team has many years of experience in this area of expertise.