Foreclosure vs. Short Sale
Why a Short Sale Wins Every Time
Many people wonder what the difference between a short sale and a foreclosure really is. Isn't it all the same, if you are going to end up losing the home either way?
Yes, you do forfeit the home either way. But the outcome for you down the road - whether you let your lender come and take your house, or whether you take charge, sell the home, and settle your debts yourself - will make a difference in your life for years to come.
In a foreclosure, your lender takes possession of your house and eventually sells it to recover what they can from the money you owed on your mortgage. But in a short sale, you work with your lender to come to an agreement where you sell your house (at a loss) and pay off your mortgage at a reduced rate.
The main advantage is the possibility of settling your debts in full and avoiding a deficiency judgment. With a short sale, you can put a bad situation completely in the past and eliminate any fear of being harassed by collection agencies for years to come.
In addition, there are many other significant benefits to doing a short sale. The government HAFA program will potentially pay you $3,000 at closing, you avoid a foreclosure on your credit report, and you walk away knowing you've done everything you can to make the best of a bad situation.
Foreclosure vs. Short Sale: The Main Differences
|Credit score||You will likely lose 200 to 300 or more points off your credit score.||You will likely lose 70 to 100 points off your credit score, possibly more if the lender files a deficiency judgment.|
|Long-term impact on credit||It can take three years to start bringing your credit rating up.||You can bring your credit rating back up in 12-18 months.|
|Credit record||The foreclosure must be reported, and may be on your public record for seven to ten years.||There is no standard for reporting short sales. Some lenders may report as "agreed settlement short of full payment" and some may not report them at all.|
|Getting another mortgage||It will be five to seven years before you are eligible for a loan with giants Freddie Mac or Fannie Mae.||You may be eligible for another loan with Freddie Mac or Fannie Mae in two years - or even immediately, if you were never delinquent.|
|Security clearance||For jobs that require security clearance (e.g. police, military) your security clearance may be denied.||No effect.|
|Responsibility for deficiency||Deficiency balance is not waived on junior liens.||The HAFA program eliminates all deficiencies. Potential full settlement and deficiency waiver on all loans.|
|Tax consequences||In most cases you will not have to pay tax on forgiven debt if the foreclosed home was your principal residence.||In most cases you will not have to pay tax on forgiven debt if the foreclosed home was your principal residence.|
|Relocation credit||None.||$3000 relocation credit to seller if processed through HAFA or Bank of America Cooperative Short Sale Program.|
|Delinquent payments||Foreclosure typically begins after 60-90 days of delinquency.||Lenders often cancel or suspend the foreclosure timeline during the short sale process.|
|Home sales price||Sales price may be substantially lower than a short sale resulting in a significantly greater deficiency balance owed.||You have the ability to market your property and get the highest and best offer resulting in a substantially reduced deficiency balance and a greater chance of a full settlement with your lender.|
|First lender incentive||There is no incentive for the lender to do a foreclosure. It costs lenders on average $59,000.||HAFA will pay the primary loan servicer $1,500 cash incentive, and up to $2,000 toward the release of the junior lien.|
|Junior lender incentive||None. Junior lender typically gets wiped out at the foreclosure auction.||Junior lender receives partial payment, so more likely to facilitate process, and potentially settle debt in full.|
|Decision-making||The banks call the shots.||You make the decisions.|
If you are a struggling homeowner, remember: you are not alone. Today, nearly 7 million residential mortgages are classified as "non-current," or behind on payments. Over 25 percent of all homes are worth less that the value of their mortgage.
If you are unable to make your mortgage payments, or are stuck with a mortgage that is much larger than the value of your house, you still have viable options for positive resolution.
It can be hard to get inspired to act, when you feel you are only falling deeper into debt. But, as tough as it may be, taking action to get out of a worsening situation not only feels good - it also means that all of these negative consequences of a foreclosure on your record, for seven or more years to come, will be avoided.
For many struggling homeowners, a short sale is the best and fastest strategy for getting rid of debts that they have no hope of paying.
Don't wait for your lender to pursue you. Take charge, and open the door to a new start in life.