Timeline to Recovery

One of my favorite things to talk about when doing short sale appointments and seminars is Timeline to Recovery. It’s one of those key issues that I think is not discussed enough when people are considering what to do with their property and how they are going to move forward with their life after shortsale or foreclosure.

Everyone is alwasy focused on the financial issues. Bankruptcy, deficiency, 1099′s all these things are important and need to be discussed but also of great importance is this question. What do you plan on doing once your shortsale/foreclosure is complete? The problem is that most people do not want to think about this. They are looking at their situation and saying “I don’t care. It doesn’t matter, whatever I do I am screwed.” Now in some aspects this is true although gravely overstated but in actual practice the different actions people take have very different outcomes and effects on their financial future.

For instance: Timeline to Recovery

Most people look at the now and immediate future. Immediate future being the next 1-2 years. When you discuss credit issues their response is focused on where they are and what is happening in the immediate future. Hence the idea that “it just doesn’t matter”. What does matter though is that the difference between foreclosure and short sale could mean the difference between 1-2 years and 5-7 years of financial difficulties. Let’s walk though an example.

Sample Seller: 90 days past due, two loans on property.

Option A Shortsale:  The average shortsale takes 3-5 months but lets assume for our scenario this is a tough file and takes 6 months to complete. Fannie Mae has guidelines that say you cannot purchase a property using government  backed financing for 3 years. Most conventional lenders will lend to you in around 2 as long as you fix your credit which is possible in about 2 years anyway. So lets add it up:

90 day delinquency + 180 day short sale process + 2-3 years of recovery: total time of credit collape is between 2 and 4 years with 4 being when you could be fully repaired.

Option B Foreclosure: The average foreclosure is running probably somewhere around 20 months. This time may decrease as the court dockets get a little less crowded but for right now this is where we are. This is already a long time but the real issue comes after foreclosure when you are trying to repair your credit. Most lenders will not even look at a file until 4 years have passed since your foreclosure. For the next 7 years you will have to state on any mortgage application that you fill out that you have had a foreclosure. Doing otherwise would be considered mortgage fraud. So lets run the numbers again:

90 day delinquency + 20 Months in foreclosure + 4 -7 years of recovery: Total time of credit collapse is between 6 and 9 years with 9 being when the foreclosure is a completely irrelevant.

Now let’s put this in perspective. Imagine our sample seller is John and he is 28 years old. He made a bad investment when he was 26 and is ready to put it behind him and move forward. In short sale by the time he is 32 and most likely a little sooner his bad investment could be nothing but a distant memory. In foreclosure John will be dealing with the ghost of his foreclosure until he is 37. How much changes in a life from 28-37? Though John may know what his priorities are now its impossible to know what they will be when he is 37. Kids, marriage, new career a lot of things can happen. Unfortunately it is very difficult to focus on the big picture when things are blowing up in the now. The tendency is to say whatever is easiest today is what I want to do. Focus on the big picture though and you may realize that the decisions you are making are not the right ones after all.

Please note there are many other things people should look at when considering short sale or foreclosure. I have focused on one piece in this post. I will be posting many other factors and if someone has a specific question I will be happy to answer it as well.