Foreclosure vs Short Sale – Which is Worse?
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Before we discuss the pros and cons of foreclosure vs short sale, let’s briefly define the term “short sale”:
The “short” in short sale refers to the payoff amount agreed to in a sale transaction as being “shorter” than the mortgage balance owed on the property. In other words, there is more owed on the home than it will currently sell for. In a successful short sale, the lender agrees to accept that shorter payoff in order to facilitate a sale of the home and thus, avoid the costly process of foreclosure.
So why, you might ask, should I consider a short sale if I am facing possible foreclosure on my home?
The short answer is that a short sale is less damaging in terms of the long-term effects on your credit. Let’s take a look at some differences between foreclosure vs short sale:
Short Sale:
* negotiated settlement
* seller’s credit bruised
* no attorney fees
* peace of mind
* buy property again in two years
* liens negotiated
Foreclosure:
* court settlement
* seller’s credit ruined
* substantial attorney fees
* no peace of mind
* buy property again in 8-10 years
* all liens exhausted
Credit Score
The losses of credit points from a short sale transaction can be almost as severe as from a foreclosure. You may actually lose as many as 300 points. So, for example, if you have a FICO score of 700, you could be left with just 400. The importance of this is the fact that having a high credit score means you will enjoy lower interest rates when you take out a loan.
Credibility
When you sell your home through a short sale transaction, it will show on your credit report as “pre-foreclosure in redemption status”. Although that sounds better than a “foreclosure” entry, it is still a negative entry that can damage your financial reputation.
Waiting Period
This is perhaps the main disadvantage of a foreclosure vs short sale. Having a foreclosure on your record may mean waiting for as long as 8-10 years before you can qualify to buy another home at a reasonable interest rate. However, a short sale will likely only require a two year wait.
Tax Relief
One other important item to note: The Mortgage Forgiveness Debt Relief Act of 2007 provides help to some of those who did a short sale, deed-in-lieu or foreclosure on or after January 1, 2007 to December 31, 2009. Check with your attorney or CPA to see if you qualify for an exemption under this law. If not, you would have to pay income tax on the amount of debt forgiven by the lender.
Disclaimer
While every effort has been made here to provide a helpful overview of foreclosure vs. short sale, there is no substitute for competent legal advice.
