A: Short-term versus long-term planning is a great decision making exercise. Many times, when people ask me this question, what they’re really asking is, “Why wouldn’t I just short sell in a couple of years, because I’m not ready now?” It’s a fair enough question but is definitely one that requires some immediate attention, even if you choose not to do anything today.
Before we list off the pros and cons of each, there’s one crucial question that you’ll need to ask yourself and have an answer for! The question is, “Where do I want to be when all the house stuff is finished?” You can’t set a course if you don’t have an endpoint. So, whether your decision is to wipe the slate now and be able to buy again in two to three years or it’s to stay in the house as long as you can and then rent, you have to aim towards something.
Let’s start with the pros and cons of waiting for three or four years, they are…
Get to stay in your house longer
Can keep the tax deductions homeownership brings
Leaves the door open for you to possibly keep the house
Avoids the embarrassment of your neighbors talking about your finances
Maintains the status quo (no changes, kids can stay at their school, etc.)
Uncertainty of how you’ll be taxed
Banks may not allow short sales then
Rental application will look worse than for those who sold short a couple of years ago
Credit recovery can make this a seven year process (staying for three and up to four more for credit recovery)
You could’ve been done by now
Now, let’s see about doing something today…
The Mortgage Forgiveness Debt Relief Act is still active
Credit recovery begins immediately after the sale
Gets you out of an “underwater” investment
Puts your recovery time at two to three years
All factors are known (like taxes, deficiencies, bank processes)
Your situation may improve to where you wouldn’t have needed to sell
You have to move
Not ready, logistically or emotionally
Loss of tax deductions
What does all this mean? Generally speaking, it means that doing something now will force immediate change but will give you known results and a quicker recovery. On the other hand, waiting comes with a huge element of uncertainty that may leave you better or worse off and will be a much longer process.
If you have a hardship (either current or future) and your home is underwater, what are you doing for yourself by staying? You’re probably going to need five to ten years of modest gains in home values just to get back to being even with what you owe. Since you’re asking what you should be thinking about, think about where you’ll be in four years if you do something now.
In most cases, if you short sale now, you’re back to being a homeowner in two to three years, you’re able to buy a comparable home for much less, and you’ll have equity in your house with any appreciation that happens. Unless you have a very compelling reason to wait, stop procrastinating and get the next chapter of your life
Contributed by: Chris Diaz