June 28th, 2010 12:04 PM by Lehel S.
Many struggling homeowners who have fallen behind in their mortgage payments fear foreclosure is their only option.
But Mayer Dallal, a certified distressed property expert with offices in Los Angeles and Pasadena, says a short sale is often the better way to go because it's far less damaging to a homeowner's credit.
Problem is, many people are unaware of this alternative.
A short sale is when a property is sold for less than the value of the balance owed on the property's loan.
A foreclosure occurs when ownership of the home is taken away from the borrower. The home is then either sold at auction, or taken back by the bank.
"With a short sale on your credit, you'll lose 100 to 150 points," said Dallal, who is also a licensed real estate broker. "But with a foreclosure, you'll lose about 300 to 350 points on average, and a foreclosure stays on your record for seven to 10 years."
A short sale also allows the bank to immediately recoup some of its investment on the home, although lenders are generally reluctant to shoulder such a loss.
But if a bank opts to press forward with a foreclosure, it will be responsible for ongoing costs associated with maintaining the home and possibly revamping it for sale at a later date.
Dallal said a foreclosure also lowers neighboring property values by about 20 percent.
"The biggest problem we're having now is a lack of education," he said. "We're trying to
Dallal said it takes expertise to effectively package a short sale. Fortunately, more lenders are coming around to the idea that - in many cases - a short sale makes more sense.
Tom Adams, owner of Century 21 Adams & Barnes, said banks are getting better and quicker at handling foreclosures. But for a homeowner to qualify, the criteria are strict.
"It must be their primary residence - it can't be an investment property," he said. "And they are not going to do a short sale for someone who has a lot of other assets. You have to need their help."
Dallal also said noted that a homeowner who negotiates and closes a short sale will be eligible for a Fannie Mae-backed mortgage loan after only two years.