Short Sale and Foreclosure Compared

If you are trying to decide between a short sale and a foreclosure, there are many details that you need to pay attention to. It is a difficult decision to make, and when you are already faced with losing your home, you need to choose the right one for you and your future. You do not want to make a bad decision that will cost you later.

What Is a Short Sale?

A short sale occurs when your mortgage lender agrees to take less than the loan amount in a sale of your home. You list the home with a real estate agent. When you receive an offer from a buyer, you submit it your lender. The lender will decide whether to allow the sale of the house at that price.

What Is a Foreclosure?

A foreclosure occurs when the bank takes possession of your home. States operate differently. Some states require you and the lender to appear in court. Others allow a foreclosure out of court. Different states allow different amounts of time between missed payments and eviction.

Do You Qualify?

Not everyone will be approved for a short sale, and a foreclosure may be the only option. If you have a hardship that can be demonstrated, then you are more likely to qualify for a short sale. A hardship could include job loss, medical bills, illness, a decrease in income or an adjusted mortgage. The lender will ask for a hardship letter describing your situation and for very detailed financial information to back it up.

Effects on Credit

A short sale and a foreclosure will both cause a big hit to your credit score. A short sale usually will remain on your credit report for a shorter period, about two to three years. The hit to your score really varies but averages around a 200-point drop. A foreclosure will show up on your credit report for seven to ten years. It will have a slightly larger effect on your score, but the big difference is the time it will stay on. The foreclosure persists longer on your report because you had a mortgage account not paid in full and, on top of this, a foreclosure shows as a public record.

Short- and Long-Term Financial Effects

With either a short sale or a foreclosure, there will be a deficiency. A deficiency is the difference between the sale of the home and the amount owed on the mortgage. You will either have the debt forgiven and receive a 1099 for taxes owed, or you will be required to repay the deficiency. If you receive a 1099, the deficiency will be treated as income, and you will need to pay income tax on it. If you have a deficiency, the lender may obtain a judgment against you and have your wages garnished in order to be repaid. Every state is different, and some do not allow deficiency judgments. Be sure to check whether your state is one that does. During the short sale process, you can negotiate with the lender to not owe for any deficiency.