The most commonly used options for homeowners with distressed properties include short sales and foreclosures. Deciding which one to go with is often more a case of becoming fully informed on the differences between these two types of real estate transactions since the homeowner loses possession of the home no matter which one he chooses.
Taking a look at these differences can help to clarify the benefit of a short sale over a foreclosure. The difference between a short sale and a foreclosure spans several different aspects including the time to accomplish each one, credit implications, tax consequences, future buying power, future employment, security clearances, and self esteem.
Not everyone facing a foreclosure is going to be able to take advantage of a short sale instead. However, for those who can seize the opportunity, a short sale is typically a win-win situation for the homeowner and the lender.
- The seller avoids bankruptcy and removes the monthly financial obligations that he has been unable to meet.
-The lender avoids having to orchestrate a foreclosure and recoups part of his financial investment by accepting less than the total amount owed.
The Short Sale Timeline vs. The Foreclosure Timeline
The short sale timeline can vary, but takes less than 4 months. It allows homeowners facing foreclosure plenty of time to begin and complete the short sale process.
The foreclosure timeline includes four separate stages: the delinquency period, notice of default period, and auction. Once a homeowner is at least 90 days behind on monthly payments (the delinquency period), the lender is permitted to record a Notice of Default or NOD (the notice of default period). During the Notice of Default period there is a auction date set out for roughly 120 days from filing of the NOD. On the sale date that has been published by the trustee, the highest bidder gains the title to the property (the trustee’s deed). The delinquency period can last as long as 12 months depending on the lender.
Credit Implications
With a foreclosure, the seller’s credit score dips approximately 250 to 300 points and affects his credit for as many as 10 years. With a short sale, the seller’s credit score drops depending on how the short sale is listed in his credit history (late payments, pre-foreclosure in redemption, settlement, or settlement for less), and its affect generally lasts between one and two years, a much shorter time period.
Tax Consequences
The Mortgage Forgiveness Debt Relief Act provides tax forgiveness for homeowners who undergo foreclosures. In some instances, it also provides relief for those homeowners who opt for a short sale instead. If a seller is responsible for taxes on the forgiven portion of his debt, the lender provides a Form 1099 that includes the taxable amount.
Future Buying Power
A short sale places homeowners in a more advantageous situation to obtain new forms of credit with less waiting time than if they have gone through a foreclosure.
Future Employment
Many employers complete a background check on job applicants. A foreclosure on someone’s credit history is more likely to prevent the applicant from obtaining the job than a short sale on the credit history.
Security Clearances
Foreclosed homeowners have more difficulty obtaining security clearances for military positions or governmental employment than homeowners who have gone through the short sale process.
Self Esteem
A short sale allows a homeowner the chance to save face while retaining his dignity and self esteem. A short sale is still a real estate sale for the seller as opposed to a foreclosure through which the lender takes back possession of the property.
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