Short Sale Benefits

Many people don’t understand the pros and cons of a foreclosure versus a short sale.  Sometimes it helps to go through these things step by step.  So here it goes…

When can I buy another house?

FORECLOSURE: A foreclosure will stay on your record for 5-7 years.  Lenders reviewing your record in order to determine whether or not you are a good candidate for another loan will question the risk, given your recent past actions.  Incidentally, Fannie Mae guidelines prohibit lending to you for at least 5 years.

SHORT SALE: We’ve had people who are current on their loan complete a short sale and buy another property within 6 months.  Fannie Mae’s guidelines require a three year waiting period, but not all lenders sell their loans to Fannie.

What sort of credit score dip will I experience?

FORECLOSURE: Typically borrowers see a 250 point drop in their credit score after a foreclosure.

SHORT SALE: It all depends on how delinquent you are.  For those homeowners who manage to stay current and receive favorable credit reporting, little to no impact should result from a short sale, and quite possibly you may see a marginal increase because the debt to income ratios just improved.

What are the tax consequences?

FORECLOSURE: You will receive a 1099-A, cancellation of indebtedness income form, if the lender chooses to write off the debt.  Typically you will not have to pay any tax on this.

SHORT SALE: You will receive a 1099-C, cancellation of indebtedness income form, if the lender chooses to write off the debt.  There should not be any difference in treatment from a foreclosure – very few people owe any tax after a short sale.

Will I still owe my lender money?

FORECLOSURE: Yes!  In recourse states (like Maryland, Virginia and DC), a foreclosure does not preclude the lender from pursuing a deficiency judgment after the foreclosure for the difference between what was owed under the promissory note and what the lender nominally received through the foreclosure sale.

SHORT SALE: Not necessarily.  The lender need not waive their deficiency collection rights in order for a short sale to close, but at least in this case you get a bite at the apple.  In other words, you can negotiate with your lender as part of the short sale process that you would like the deficiency judgment rights waived.  Often they will comply, either voluntarily or after some back and forth negotiation.  Having an aggressive negotiator helps in this process.  At the very worst, there should be a smaller shortfall here by definition – the lender would not agree to a short sale unless it behooved them to do so, i.e., the proceeds were greater than their next best alternative of a foreclosure.