Short Sale vs. Foreclosure: Making the Right Choice for a Stable Future

Millions of Americans have lost their homes to foreclosure during the housing market crash. There is also a growing trend of distressed homeowners that have sold their home through a lender-approved short sale for less than the balance owed.
Lenders often prefer a short sale to a foreclosure because it saves them money. While lenders may lose less in a short sale than a foreclosure, how does the distressed homeowner fare?
There is much discussion in the media about whether a short sale or a foreclosure is a better choice. This article will compare the two scenarios so homeowners can make an educated decision about how to proceed when faced with this challenging situation.
Effects on Your Credit

According to FICO, short sales have the same effect on your credit rating as a foreclosure, lowering your score 75 to 160 points. If you have a higher credit rating before entering into a short sale or foreclosure, the drop in score will be more significant, as indicated by the Short Sale vs Foreclosure chart issued by the FICO Banking Analytics Blog. The flaw in FICO’s research is that they are applying theory to an event that is happening to millions of households across the nation. The reality is that, compared to the rating of borrowers who have foreclosure on their reports, those that have chosen short sales consistently experience a lesser impact on their credit scores.
Effects on Current and Future Employment

Now more than ever, employers are checking a potential employee’s credit report before hiring. Some even pull credit reports on existing employees on a recurring basis. Having a foreclosure on your credit report may affect your ability to gain employment and may even affect your ability to keep your current job in “at will” employment states.
In “at will” states, an employer can fire an employee for any reason not protected by antidiscrimination laws or US Bankruptcy Code 525, which forbids an employer from discriminating against an employee who has filed for bankruptcy. In these states, an employer can terminate employment based on information found in a credit report.
If you are in the military or in another position that requires you to have security clearance, a foreclosure may also have an adverse affect on your employment. If this describes your situation, a short sale or other foreclosure alternative should be considered.

Effects on Ability to Buy a Home in the Future

One of the biggest benefits of a short sale over a foreclosure is your ability to obtain a mortgage more quickly after the transaction is completed.
For every institution that backs a mortgage loan, the waiting period after a negative credit event is significantly shorter after a short sale.
Most distressed homeowners are experiencing temporary financial reversals, and the flexibility to reenter homeownership when they are ready is seen as a huge advantage of a short sale.
Deficiency Judgment

The deficiency judgment is the amount owed to the bank after a short sale or foreclosure. In deficiency judgment states, the borrower may be liable for the amount owed to the lender until it is paid in full.
In the event of a short sale, the homeowner has the right to negotiate or have the deficiency judgment completely waived. In a foreclosure, the homeowner does not have the opportunity to negotiate the deficiency, and will always be liable for this debt, often numbering in the 10s of thousands of dollars or more.
Psychological Effects

Many distressed homeowners find that short sales give them more control and enable them to stay in their homes while the home is for sale. They can avoid the stigma of foreclosure and be an active participant in the process of working out a deal with the lender.
In a foreclosure, the lender orders the homeowners to leave on a certain date. The event is also made public and is often an embarrassment to the homeowners and especially hard on children who don’t fully understand why they have to leave their homes.
Weighing Your Options

Although a short sale and a foreclosure may have similar implications to your credit, it is clear that for most distressed homeowners, a short sale has many benefits that lessen the blow of an already challenging situation. It is also an honorable, cooperative way to work with the bank to lessen its loss while alleviating the burden of paying a mortgage you can no longer afford.
Being able to purchase a new home as soon as your financial stability is restored is also a key benefit of short sales. Even if you choose never to own a home again, knowing that you have the opportunity to negotiate the deficiency judgment is also a benefit that should not be overlooked.
Consult to a Certified Distressed Property Expert for more information about short sales and other alternatives to foreclosure. A qualified and experienced licensed real estate professional who specialized in foreclosure prevention can help guide you through the process and put you back on the path to financial and emotional stability.
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