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A deed in Lieu is more damaging to your credit. But the question I would ask you is what is your situation and what are you trying to do with your property?A short sale is a great option if you need to sell your property because your are insolvent both long term and short term, and you have negative equity on the property.
If you would like to stay in your home and your financial hardship is short term, a mortgage modification or loan modification is a much better alternative.
Both a short sale and loan modification are much better alternatives to a foreclosure, deed in lieu or bankruptcy.
I know this is old but the knowledge of the real estate industry on this topic is pretty sad to say the least.That or they are just outright lying. If you went late on your short sale, then the actual credit drop is almost identical. Very few people out there are able to do a short sale and remain current on their mortgage. My FICO states that the credit drop for short sales and foreclosures is the same. I can tell you from personal experience that my foreclosure caused my credit to drop right at 80 points. I am over 700 and rising a few months after mine. In non-recourse states the short sale can actually leave you vunerable to the bank slipping something your contract that may make you liable when you would not have been if they had just foreclosed. Another thing you real estate agents need to keep in mind when you comment on things like this is it has more to do with state law than anything else. Advice from Florida is absolutlely worthless in California and vice versa.
This is not tax or legal advice. Seek appropriate tax or legal counsel.
Short sale is much less damaging to your credit than a deed in lieu. A properly negotiated short sale will show up as a debt paid in full. There will be no indication on your credit that the sale was a short sale. The hit to your credit will come from late payments or no payments which could prevent you from obtaining credit. The hit will be 25-100 points which should drop off your credit report after two years.
The short sale should be negotiated so the lien holders accept the short sale as payment in full with no recourse. You will receive a 1099 for the forgiven debt. If the lien holder has recourse, then you will not receive a 1099 and the debt continues to be collectible. A lender can forgive the debt and issue a 1099 or continue to collect the loan deficiency but not both.
If the property is a primary residence, then up to $2M of the loan deficiency may not be taxable income. Please seek appropriate tax or legal counsel. Mortgage Debt Forgiveness Relief Act and Debt Cancellation http://www.irs.gov/individuals/article/0,,id=179414,00.html
A loan modification is a good idea, but you need to be aware that it may not solve your financial problem. According to Comptroller John Dugan, Office of the Comptroller of the Currency, after six months more than 50% of borrowers who received a loan modification re-defaulted. http://occ.treas.gov/ftp/release/2008-142.htm
Cheers,Michael P. LindekugelCommercial RealtorCertified Distressed Property Expert
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