Foreclosure vs Short Sale

Losing your home to foreclosure due to the incapacity to remain current on monthly mortgage payments is one the most displeasing events that can occur in one’s lifetime. Along with the losing your home to the bank, foreclosures have a lasting effect, such as, the long term destruction it has on a person’s credit score.

Unfortunately, life changing events do happen and occasionally these events may result in the inability to make mortgage payments. Fortunately, there are other options to the much dreaded foreclosure. A short sale is a very popular option for homeowners are delinquent on their mortgage payments. A short sale is described as selling your property for less than what is owed to the lender. The largest dilemma is getting your lender to agree to a short sale. In many circumstances, they will not, however, lenders would much rather do a short sale then spend all the money, time and legal documents that is involved in a foreclosure.

Short sales have its shortcomings as well. While a short sale will rescue you from foreclosure, it will also have a harmful impact on your credit score, lowering by as much as 215 points in some circumstances. This option, however, can be overcome much quicker than a foreclosure. Another downfall of a short sale would be the fact that the IRS will often consider the difference between the mortgage balance and the amount paid off by the short sale as taxable income.

The difference between the mortgage balance and the amount of the short sale is called a deficiency balance. The deficiency balance is monies still owed to the bank due to the shortfall. Often this can be negotiated down, so that the short sale will cover payment in full and the bank will not take pursuit of this deficiency balance. The homeowners may have to declare bankruptcy further down the road to get rid of any deficiency balance that may not have been negotiated.

A 1099 is often given to the homeowners as an outcome for the “income” earned from the short sale. In today’s economic state, however, lenders are so bogged down on all of the short sales and foreclosures, many of the 1099s are not sent out.

At the end of the day a short sale is not pretty and they are not simple to execute. They can hurt your credit and you may owe taxes on the “income” earned. Ultimately, however, they are a better situation than a foreclosure that will destroy your credit and the lender may still come after you in pursuit of monies owed.

If you or someone you know may be losing their property, let me know. I can help them avoid Foreclosure. The quicker you act, the easier it is to save.