Foreclosure vs. Short Sale. Which is Better?

25 Comments so far

1. Frances Flynn Thorsen on October 30, 2009 11:25 am

   I think the best advice comes from an attorney. I do not believe real estate agents should answer this question for consumers. The answer is not one-size-fits-all. There are numerous factors to weigh in the decision. An attorney is best qualified to help homeowners make this choice. In some cases, bankruptcy is the best choice.

2. Jeffrey on October 30, 2009 1:09 pm

   If you want to stay in your home and could just get by with a lower monthly payment. I may have a great answer, email me through my profile. If you do not want the house and you are wanting to walk away. Short sale is your best option. I run an attorney backed loan modification company and could see if you qualify for free, in 3-7 minutes.

3. Jeffrey on October 30, 2009 1:11 pm

   If you go to website enter Jeffrey Luther as referring agent I am rated #1 at the office last month.

4. Andrew on October 31, 2009 8:28 am

   We successfully completed a short sale in 2008 and are very happy we did. Our credit scores took a hit for a while but are now going back up. For us, a bankruptcy was out of the question. Recommended reading: myshortsalesuccess.com. It really depends upon how much other debt there is. You might need to consult with a CPA and or an attorney. A short sale affects your credit for about 2 years or so and a bankruptcy is at least five years.

5. Leanne Finlay on October 31, 2009 10:40 am

   I believe anyone considering a short sale vs a foreclosure should first call their lenders’ modification department, and discuss the situation with them.

   Try to get the payment modified. Try to hold onto your home if you can.

   However, if you cannot find a way, then call a real estate attorney (not just any attorney, find one that handles real estate matters), and get some professional advice for your own situation. Sure, you might spend an hour or so of attorney billing time - but this is a big financial decision, so it will be something you want to get best advice.

   Please don’t take advice from internet writers like myself or the others. We know nothing about your personal situation, and we are not licensed to give legal advice.

   What I can also tell you is that foreclosure is not the same as bankruptcy, and also that if your attorney suggests that a bankruptcy might be your best option, that that isn’t the worst thing that can happen to you.

   Life goes on. Get your financial house cleaned up, and get re-balanced, and yes, you will be able to own a home again, and possibly sooner than you think.

   Don’t be worried about discussing your situation with a real estate attorney. It won’t cost as much as you think. If you don’t know anyone to talk to, ask your favorite real estate agent for some referrals.

   Keep in mind too that attorneys will treat all of your information confidentially.

   But first, make that call to your lender modification department.

6. litchfield on October 31, 2009 2:28 pm

   that is a difficult question - We have a client right now that is going through a short sale and it is painful. Its literally an emotional roller coaster for everyone.

   The problem with short sales it seems is it is really such a new activity still and so many of them are being done. There doesn’t seem to be a real system in place yet with most banks.

7. Baltimore Foreclosures on October 31, 2009 10:00 pm

   Foreclosures are better to deal with than short sales in my opinion. Either way you will be getting the property as-is. The bank is going to sell it to you for close market price and the seller in a short sale will not be able to get it approved for less than 80-90% of market value with a 2-3 month wait just for a responce.

8. Kris Darney on November 1, 2009 1:16 pm

   Diane,

   My partner and I have helped over 250 families in Southern California in the last 3 years by selling their properties short.

   Out of these transactions, not 1 has had a negative impact on the seller.

   While their are tax implications with Short Sales, the same implications exist for a Foreclosure.

   The beauty of the Short Sale is that you can limit your exposure by selling the property for the current value in a Short sale transaction (”the spread” or difference between your loan amount and what the property sells) which you as the homeowner can control along with your Real Estate Agent. Or, you can “role the dice” with a foreclosure and and suffer by an increased spread or difference from the original loan amount to what is sold at auction + the associated legal fees the bank incurs during the Foreclosure process.

   As for credit, your credit score will be impacted equally…initially, but as we have witnessed first hand, there are major lenders that will allow you to repurchase another home right after the short sale process as long as you have paid your obligations including the payment on the property you short sold. If you choose a foreclosure, your credit will be impacted for 5 to 10 years and you will not have the option of re-purchasing for a minimum of 5 years as long as the “foreclosure” remains on your credit.

   States have different laws. In California, “purchase money loans”, a loan that is taken out by a buyer to purchase a home and that loan has not been refinanced is generally not susceptible to any “recourse” if sold at Short Sale or is forelcosed. On the other hand, a note that has been refinanced away from a “purchase money loan” is susceptible to “recourse” from the bank taking the loss however, a good Short Sale agent worth their “salt” can negotiate that “recourse” option away during the short sale process.

   As for tax implications, as long as the property is the primary residence, the tax ramifications are eliminated under The Mortgage Forgiveness Debt Relief Act of 2007. This law applies to both Short Sale and foreclosure and should be read in whole to understand your qualifications.

   I am not a CPA or an attorney, and the laws are clear and succinct. You as a Realtor, can become knowledgeable by aligning yourself with both specialists and you can make the Short Sale transaction the best opportunity for a homeowner that is suffering from an overwhelming burden of increasing payments or a simple need to move.

   Regards,

   Kris Darney
   DRE# 01464957
   Platinum Real Estate
   West Covina, CA

9. Pacita Dimacali on November 1, 2009 4:20 pm

   If at all possible, we try to help the homeowner by attempting a short sale for a number of reasons that were succinctly laid out by CDPE (Certififed Distressed Property Experts)in a matrix.

   Here are 10 categories where effects of foreclosure versus short sale are compared:

   1. Future Fannie Mae primary loans — foreclosed homeowners are ineligible for 5 years; short sales owners for 2 years

   2. Future Fannie Mae, non-primary — foreclosed homeowners are ineligible for 7 years; short sales owners 2 years

   3. Future Loa with any mortgage company — foreclosed owners, 7 years

   4. Credit score — foreclosed owners score lowered anywhere from 250 to over 300 years, and wil affect score for over 3 years. Short sales scores affected as little as 50 points, and they can recover or repair credit as brief as 12-19 months

   5. Credit history — foreclosure stays on record for 10 years or more; short sale not reported on credit when sale is reported as paid in full

   6. Security clearance — in some cases, may be revoked for foreclosed owners

   7. Current employment — employers regularly check credit of employees in sensitive positions, and forelosure may be grounds for reassignment or termintation.

   8. Future employment — many employers require credit checks. A foreclosure is a detriment.

   9. Deficiency judgment — in some states, banks may have right to pursue

   10. Deficiency judgment amount — depends on how much the property sells for and thow (thorough the REO process? Auction?) Lower price and longer time t sell may result in higher judgment.

10. UK Stop Repossession on November 1, 2009 10:48 pm

    The decision “Foreclosure. vs Short Sale. Which is Better?” is situational. Pacita Dimacali gives a detailed analysis of this fact. Repossession can be stopped either by selling the property or selling it or rent it back. The first choice comes into effect when the owner doesn’t wish to continue with the present living place and the later is the vice versa.

11. Tx Hill Country Realty on November 2, 2009 3:20 pm

    There is no right or wrong answer to the question the way it is asked. Each individual’s situation, needs, and desired outcome comes into play to figure out the best route. Either way, I do not feel Real Estate agents should be the best source for advice. Sellers that find themselves in this difficult situation should seek the advice of both Attorneys and CPAs or Financial Advisors.

12. max moose on November 5, 2009 10:06 pm

    This is a Hobson’s Choice. You wind up with similar problems either way. In a state like Florida you will wind up with a bill for the difference between the proceeds of the sale and your remaining debt. In a “mortgage forgiveness” state you will wind up at least with a 1099 for that amount, and the IRS will be looking for its money — which may be even worse.

    Unless the remaining debt is relatively minor for YOU — and for many people these days even 20k of debt is significant — bankruptcy is a likely follow-on, with ensuing credit and employment discrimination — the latter for no rational reason.

    Still, being rid of that house that you can’t afford and that is worth 50% of what it was 3 years ago, may bring a sigh of relief. So while it depends on your circumstances, there may not be much sense to a short sale which robs you of your house, still leaves you in debt, and still leaves you with major credit problems.

    You should seek opinions from both a CPA and attorney, who more often than not will disagree with one another.

13. max moose on November 5, 2009 10:47 pm

    Note to Kris Darney’s comment above: that “as long as” your home is a primary residence is an awfully long “as long as,” and it does make a difference what state you are in. An investment property has a higher probability of being distressed than a primary residence. Also, it is not at all certain what years this tax forbearance will continue to apply to in the future.

    In practical terms, many people who have 1099-G tax problems are going to have credit card problems as well, so bankruptcy is often the the cleanest sweep. Ignore radio commercials that tell you credit card debt can’t be bankrupted — consult an attorney for your situation.

    While I am not suggesting anyone be a free-loader, many people have stayed in their primary residence relatively unmolested for a year or more while a foreclosure case works its way through the courts.

    So who is most likely to come out a winner from a short sale? The broker who gets your listing — like Kris Darney, above.

14. suarez on November 6, 2009 6:51 am

    my husban and i went up to the poconos to see some homes and i fell in love with a fixer upper we are very interested in this home but we would like to inspect the home to make sure theres no damage to the foundation we spoke to the realtor ladie and she acted kinda strange putting us on hold and then returning telling us that her broker said that if we want to inspect the house we have to make an offer on it or sing an agreement comiting ourself to buy no matter what. is this leagal? were first time home buyers, mine you the house has about $45,000 worth of reapairs and thats just what we seen. can some one PLEASE HELP………..

15. Foreclosure vs. Short Sale. Which is Better? on November 6, 2009 7:58 am

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16. Lauren Nemeschansky on November 6, 2009 7:27 pm

    I do many short sales as a realtor in Santa Clarita California. In most cases a short sale is much better than a foreclosure because your credit is not hit quite as hard, especially if you did not miss that many payments. I had a client who did not miss ANY payments and she was not hurt at all, and it is NOT TRUE that you need to be delinquent in your payments prior to getting a short sale approval. Also a short sale is not stamped on your credit report as is a foreclosure which remains for many years which I am told can also hurt your future job prospects.

17. Regina on November 6, 2009 10:06 pm

    There is so much misinformation above. Foreclosures stay on your credit record for 7 years, and by law, they have to come off after 7 years.

    We relocated for my husbands work, our old place lost 50% of its value, renting is not an option. I’d prefer a short-sale, because of the smaller credit impact, but the lender wants all of our assets before agreeing to a short sale. So, we’ll take a foreclosure and keep our life savings (in CA).

    And life will go on.

18. ninjaslice on November 7, 2009 12:47 am

    Foreclosure was definitely the right choice for me, I just wish that I didn’t completely waste 3000.00 on a B.S. 6 month long loan mod through a crappy law firm. I wanted to keep the home as a rental, but a couple hundred dollar p/ mo. mortgage pymt. deduction for a 3 month “trial” wasn’t worth the trouble and go through the trouble of a shortsale???? Sending continuous monthly financial statements to the bank that “loses” my sent documents while my house in on the market before they’ll even CONSIDER a principal reduction??? No thanks. 120K under water on a home in a deteriorating neighborhood in Northern Ca. I’d be paying for it the rest of my life and may never live to see any equity in it vs. 7 years of a dinged FICO. My new wife was not on the existing mortgage, so her credit is not affected. No HELOC loan for possible deficiency judgements. I had 800+ credit score and didn’t want to ding my credit, but didn’t have a choice other to make the better business choice. I’m not a winner in this situation, but the banks sure aren’t either. It will be interesting to see what banks and the fed are going to do to stop the forclosures from rolling in through 2011-2012 if anything.

19. w bruce cathie on November 7, 2009 11:32 am

    I don’t think that there is any simple 1 or the other, each client’s case must be assessed by quite a bit of differing criteria. Real estate agents should be working with a team of experts(lawyer, accountant, home inspector, etc)and advising the client(s) as to the best possible composite decision available.

20. Shaun on November 7, 2009 12:08 pm

    I see both sides of everyone’s point of view. I have been working with homeowners attempting to get better terms for their mortgage, with lots of barriers and feet dragging by the banks and lenders. Yes I believe the short sale is a better remedy to the situation than a bankruptcy, credit wise and the later effects of the bankruptcy action. I read that 95% of NOS/FORECLOSURE sales are going uncontested. California being a Non-Judicial state, foreclosures are very lightly monitored by the courts. I believe that homeowners have the right to verify the bank paid trustees are processing foreclosures in a lawful manner before they go down the above remedies. I see evidence daily that most are cutting corners. No one is calling them on it, the folks entrusted to give legal advice or otherwise. Please spend some time and look into all avenues before you choose to give up your castle. On a side note credit deletion laws that are in place as of today can basically erase everything up to a chapter 13 BK and establish new trade lines if necessary. In a 6-10 month period you could repurchase a home at today’s value. If your home is so upside down, then the correct answer is to dump it and choose to live down the street for a fraction of what you currently owe on your present home. That being said the holidays are a pond us, so please do something for the less fortunate in your area and reap the rewards and you will benefit in more than one way.

21. Jack on November 10, 2009 8:36 am

    To foreclose or short sale? That is the question.
    Being a realtor that had gone through this tumulous state of economy, I can tell you of my situation.

    I filed for a Chapter 7 and came up ahead. I owed more than $90K in unsecured debt and my mortgage is upside down and what do I care about FICO score? No remorse on that.
    My credit was dinged for a year and I still get credit cards offer every now and then some with fees some without. So, did I come out ahead. You can bet your sweetie pie.

    FYI my debts was discharged and I am now using one cc with fees and the other with annual fees. My foreclosure is still ongoing and I haven’t paid a single penny since Apr 2009.

    I still get a job with the government and I am still existing, life goes on. This is a great time for bankruptcy Chapte 7 due to the state of economy and I would say that check with a bankruptcy attorney, it only cost me $1500 to resolve all my problems. It’s worth it considering the huge debts I was in.

22. yolanda on November 10, 2009 9:53 am

    I have to agree with Regina and Ninjaslice on this post. Foreclosure was best for me as well. I purchased my home in Northern VA for 349,000.00 which was a very bad deal in the beginning because it was way above the comps in the area. But I was a first time home buyer and trusted my Realtor who was my friend. The current balance on my home is $330,000. The condos are now going for $197,000-225,000. You do the math. My condo fees is 300 a month plus additional 2674.00. Not able to rent it, i know the bank will not modify it but only so much because of the price. I had a loss of income plus medical issues. I did send all paper work to company asking for assistance but they keep asking for the same paper work again. So, i moved out into a nice apt, have my money in savings and content with my quality of life and health. It is what it is and this works for my situation. I am not concerned about my credit because that has never stopped me before to get what i want. I am very stress free and that is just part of life. You have to weigh your situation.

23. george on November 10, 2009 12:27 pm

    At this time there are no tax consequences For now.

    ability to purchase a home again is not that hard if you are willing to pay a little more in fees and interest Therefor benefit to a short sale vs. a foreclosure sale?

    Are not there for the most part

24. Ronald Crawford on November 11, 2009 9:24 am

    I currenlty owe $162,000 on my house which is located in Union City, Ga. Homes are curently short saleing in my sub-division for $75000 to $115,000. I had to transfer to Charlotte, N.C. due to my distribution center in Atlanta, Ga closing I had to relocate to Charlotte. Therefore, I cannot afford to pay a hous note in Union City were I not longer live and pay rent in Charlotte. My home is current on the market for a short sale @ $79,900.

25. Leny on November 16, 2009 10:20 pm

    Short sale is better than foreclosure of course!
    If there is no deficiency on the seller after close of escrow. It depends on the negotiation with the short sale department.