Foreclosure vs Short Sale – Choosing The Lesser Evil

If you ask people facing foreclosure which is a better deal between foreclosure and short sale, they would probably tell you there’s not much difference as you will still be losing your home. However, knowing the distinction of foreclosure vs short sale will help you decide which is the better option for you.

Foreclosure vs Short Sale – Why Short Sale Is The Better Option

Foreclosure or Short Sale?

Photo Courtesy of Mike Licht, NotionsCapital.com via Flickr

In a short sale, there is more owed on the home than it will currently sell for. Short sale is a very popular option for people who are experiencing financial problems with a foreclosure looming large. It’s usually not hard to find buyers that would want to purchase a home in a short sale, however, you have to get the lenders to agree to let you do the short sale, which may prove to be quite a challenge, as lenders will not always allow you to do this. Remember too that the longer you wait, the less likely your lender will allow you to go with the short sale option.

Talking of the amount of damage to your credit, short selling will damage your credit for 24 months. A short sale can lower your credit score to up to 200 points or so.The bright side of it though is that Fannie Mae guidelines state sellers may still be able to apply for a new home loan in as little as 2 years from the date of closing of the short sale. Also, the short sale will also be reported as a debt settlement on your credit report, and not a foreclosure. Some states such as in California, a short sale gives the seller the opportunity to walk away – without owing the bank anything, and without being pursued by the banks.

There are, however, some disadvantages to going with a short sale. For instance, the difference between the short sale amount and the mortgage balance is actually considered to be income by the IRS. This means you may actually have to be paying taxes. However, you may qualify for an exemption under this law through the Mortgage Forgiveness Debt Relief Act of 2007, otherwise, you will be required to pay income tax on the amount of debt forgiven by the lender. Finally, a short sale does not involve a public notice nor a public auction.

People facing foreclosure must make the best decisions and not let the banks or anyone decide their fates. But to do this, one must look at the facts of foreclosure vs short sale. Till then, you may be able to decide which option is the best for you.

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