Short Sale vs. Foreclosure

Whether or not you ought to execute a short sale or let the home head to foreclosure is dependent upon several factors. While for many homeowners, it’s simpler to throw up both hands and let the bank take your property, which might not be the wisest course of action.

Short Sale Benefits

Here are several advantages for doing a short sale which may not have occurred to you:

• You are in charge of the sale, not the bank.

• You may sleep better at night knowing who’s purchasing your home.

• You will spare yourself the social stigma of the “F” word, foreclosure.

• Contrary to popular belief, you can be current on your payments and still effect a short sale.

• Your home sale is going to be handled like any other home sale.

Buying Again Following a Short Sale

If your payments have not fallen behind 30 days late and also the lender doesn’t require that you pay back the loan, Fannie Mae guidelines may permit you to buy another house right away. Finding a lender who’ll fund that sort of loan is quite challenging. For anyone who is current on their mortgage, it is possible to qualify for an FHA loan immediately as well, but lender requirements may be unusual for instance you have to move more than 600 miles away.

If your payments have been in arrears yet a short sale is granted from your lender, you could qualify to buy another home with a Fannie-Mae backed mortgage within 24 months, regardless of whether the house is your primary residence. The wait for FHA is 3 years.

Buying Again Following a Foreclosure

With certain constraints, you might be eligible to buy another home in 5 years in the event the home was your primary residence. Without restrictions, the wait is 7 years.

If you’re an investor and don’t occupy the property, the wait to purchase with a Fannie Mae insured loan is 7 years.

Effects on Credit Following a Short Sale

A short sale might be thought as a derogatory mark on your credit despite the fact that credit bureaus don’t show the word “short sale” on your credit report. It may well say “paid in full for less than agreed” or “settled for less,” among other categories. Some clients have revealed negative FICO score drops from 50 points to 130 points.

Major point drops are usually as a result of being in default, meaning you’ve fallen behind on your payments.

Effects on Credit Following a Foreclosure

Depending on your credit history along with other guidelines, Myfico.com shows 2 examples where a credit score could fall 105 points to 160 points following a foreclosure. Usually, a foreclosure will stay on your credit report in the tradelines section for 7 years.

Credit Reports Following a Short Sale

All lenders report short sales in different ways, with numerous reporting “paid in full for less than agreed,” and a few report the short sale as a charge off. Negative credit, on the other hand, stays on your report for 7 years.

Credit Reports Following a Foreclosure

If a prospective employer runs a credit assessment on you, your job application could be declined if you have a foreclosure on your record.

Deficiency Judgments Following a Short Sale

Judgments in many cases are negotiated between the seller and also the short sale lender. In some instances, such as California, if the home is your own personal residence and was financed through purchase money, there’s no deficiency judgment.

Deficiency Judgments Following a Foreclosure

Banks are usually unwilling to negotiate deficiency judgments with the homeowner after a foreclosure. In California, for example, based on the California Association of REALTORS, a deficiency judgment might be filed regarding a hard-money loan if the lender forecloses under a judicial foreclosure versus a trustee sale or in the event the second loan is a hard money loan and the sale takes place as a trustee’s sale.

Loan Application Questions Following a Short Sale

Loan applications usually do not ask questions in regards to a short sale. You may report that you sold your home.

Loan Application Questions Following a Foreclosure

You are required to answer the question: “Have you ever had a property foreclosed upon or given a deed-in-lieu thereof in the past 7 years.” If your bank sees you’ve had a foreclosure, your loan most likely is going to be denied. In the event you lie, you may be subject to investigation by the FBI for mortgage fraud.

Length of Time to Move Following a Short Sale

If you’ve had a foreclosure notice filed, you could be able to postpone that action while the bank considers your short sale. The wait for short sale approval may be from 2 to 3 months, or longer.

Length of Time to Move Following a Foreclosure

Unless prior arrangements have already been made, the bank might need you to immediately vacate the property and can commence eviction proceedings.

Taxation Following a Short Sale

A personal residence is exempt from mortgage debt relief until the end of 2012 on a federal level. Some states will still tax you unless you are eligible for an exemption. An investor is not exempt from mortgage debt relief, subject to certain conditions.

Taxation Following a Foreclosure

Same as with a short sale. Except some lenders immediately mail out 1099s, even if the owner is exempt.

 

In closing, always obtain legal and tax advice prior to making a choice between a short sale or a foreclosure.

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