SHORT SALE VS FORECLOSURE

Many homeowners wonder why they should consider a Short Sale Vs. a Foreclosure.  Don't both result in you not owning a home anymore?  Won't both affect your credit?  The answers may surprise you.  Consult the table below for some comparisons:

 

 Short Sale

Foreclosure 

 What's the effect on my credit?

 Credit bureaus do not show the word "short sale" on your credit report. It may say "paid in full for less than agreed" or "settled for less," among other categories. Some clients have reported negative FICO score drops from 50 points to 130 points.

A number of sources have reported FICO score drops from 200 to 400 points after a foreclosure. Generally this will remain on your credit report as a public record for 7 to 10 years.

 Can I Buy another Home in the future?

 If your payments are in arrears yet a short sale is granted by your lender, you may qualify to buy another home with a Fannie-Mae backed mortgage within two years. The wait for FHA is 3 years.

 With certain restrictions, you may be eligible to buy another home in 5 years if the home was your primary residence. Without restrictions, the wait is 7 years.

 Will the Lender Pursue a Deficiency Judgment?

Judgments are often negotiated between the seller and the short sale bank. In New Jersey, if the home is your personal residence there is no deficiency judgment.

Banks are unwilling to negotiate deficiency judgments with the homeowner after a foreclosure.  This means the homeowner will still owe the entire amount of the mortgage debt even after being foreclosed.

 How will I be taxed?

 A personal residence is exempt from mortgage debt relief until the end of 2012 on a federal level.  An investor is not exempt from mortgage debt relief, subject to certain conditions.

Same as with a short sale. Except some lenders immediately send out 1099s, even if the owner is exempt.

 

Terms:

FICO - The acronym for Fair Isaac Credit Organization. A measurement of a borrowers credit risk commonly used by creditors. The score is based on a borrowers credit history and many other credit factors. The scores range from between 400 and 850.

Deficiency Judgment - A deficiency judgment is a judgment lien against homeowner/borrower whose foreclosure sale did not produce sufficient funds to pay the mortgage in full. This option may or may not be available to the lender, depending on whether they have made a recourse or nonrecourse loan.
1099 - A form reporting one's non-employment income from a given source for a year