Short Sales vs. Foreclosure – The Process

Many of you are probably wondering what you should do with your underwater mortgage, and for some of you, the only options are probably short sale or foreclosure. It’s not an easy question to answer: only licensed financial professionals and realtors should be giving you advice on which to choose, and even then, they should be doing it in person or over the phone. Never, ever take advice from a stranger.

That said, we’re going to go over what the differences between short sales and foreclosures are, so that when you do talk to a professional (in person!) you know a little more what you’re talking about. When it’s your financial survival on the line, you want to make sure you’re as informed as possible.

Many of you are probably wondering what you should do with your underwater mortgage, and for some of you, the only options are probably short sale or foreclosure. It’s not an easy question to answer: only licensed financial professionals and realtors should be giving you advice on which to choose, and even then, they should be doing it in person or over the phone. Never, ever take advice from a stranger.

That said, we’re going to go over what the differences between short sales and foreclosures are, so that when you do talk to a professional (in person!) you know a little more what you’re talking about. When it’s your financial survival on the line, you want to make sure you’re as informed as possible.

The Process

In a short sale, the owner begins the process of selling the home. The process of getting a hold of the right person will likely be somewhat complicated, but the seller is largely in control of the proceedings. In a foreclosure, the bank may begin the foreclosure process after a certain trigger is reached, which may be as early as 30 days late on a payment. The bank will pretty much take over from there, and the homeowner will essentially have no control over the process.

When a short sale is completed, the owner will be expected to vacate the premises, just like any other home sale. The benefit some short-sellers get is that if they had previously been served foreclosure papers, the bank may be required to allow the homeowner to stay a few months while the short sale application is reviewed. After a foreclosure is complete, the bank may begin eviction proceedings immediately

The Effects

A short sale is a little less damaging to your credit score than a foreclosure, but both are certainly going to take significant chunks out of your credit number. Short sales cause drops of up to 130 points; foreclosures cause drops of up to 160 points, and don’t forget that each missed payment will also cause a credit drop. As items on your credit report stay there for seven years, either route is going to be rough on you.

In both cases, there may be a “deficiency judgment”, which means the bank is pursuing the part of your loan that was not paid back by the value of the home at the time of sale or repossession. That’s not so good for you, as it may bring additional credit drops if you don’t pay. The benefit to short sales, here, is that you can sometimes make a deficiency judgment waiver part of the terms of your sale, effectively dodging the bullet.

In terms of buying another home, short sales offer a little bit of comfort: if you manage to short-sell without any payments falling thirty days late, you may be able to buy again immediately (though finding a loan may be difficult. If you paid late, you’ll have to wait two or three years, depending on whether you’re taking a Fannie Mae-backed loan or an FHA loan. With a foreclosure, you’ll have to wait at least five years before owning again.

Conclusion

Please consult a financial professional before making a decision, and consider credit repair as part of the process. It’ll be important to get back on your feet as quickly as you can.

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