Why Should I Do A Short Sale As Opposed To Letting My Property Go To Foreclosure?

Simon,

You mention a key benefit that you do not have to acknowledge you sold your property as a short sale but would have to declare the bankruptcy. and yes I agree 7 years is a long time and doing a short sale is a viable option in this economy..

Hi Simon, That's a great point. It's a question I've raised more than once and your answer is better than the others I've been given. Thanks

Liz

A person's credit is much less affected by a short sale than a foreclosure.  Here's why.

A short sale, to the credit companies, will basically just show a late payment period on your credit report.  Sometimes, there will be something to the effect of 'paid in full, less than balance,' often not.  Sometimes, lenders want to add a deficiency judgement against the seller or setup a new loan for the remainder of the balance. Both are better than a foreclosure.

If the deficiency judgement is recorded, it's still something that can be removed, either by paying off (at some point) or by arguing your case.

A new loan will actually HELP your credit, assuming timely payments.

Even a deed in lieu of foreclosure is a better option than a full blown foreclosure on your report.  At least with a deed in lieu, lenders in your future will look on that as YOU at least trying to work with the lender and 'saving' them the cost of doing a full-blown foreclosure.

I have, though, it's been years ago.  Even though it's been a big news story in the last few months or so about the changing of the FICO scoring system, the truth is that credit reporting companies change their criteria all the time.  When this whole mess starts to die down, it's more than likely the system will change a bit again.

That said, there are basic 'rules' if you will that will always guide the process.  Late payments affect credit score, but not as much as a short sale would and for not as long.  Likewise, a foreclosure is worse than a short sale because at least in a short sale, the debt was paid at the agreed upon price.

That is also why a deed in lieu is a better opton than a straight foreclosure.  Basically a deed in lieu means that the bank agreed to "buy" the property back from you for the balance owed and it has to be reported as 'paid in full' but it comes with a "deed in lieu" disclaimer.

ALL the above situations would have an adverse effect on you getting a loan, Simon.  The question is "how adverse."  A deed in lieu would be a LAST option, but it's still better than a foreclosure.

Simon - that was a good point - something to think about and inform.  I'd never heard that until now.  Appreciate i'll have another reason to help someone make the right decision.

Diane

Interesting. I also understand that more banks and mortgage lenders are looking and loan fraud in a different light nowadays instead of just ignoring it in order to make a loan.

Simon, That is one advantage, you are right. I had not thought about that.  I had a conversation with an attorney a couple of weeks ago that said the "Foreclosure" laws that protect consumers do not protect participants of  short sales and that technically the bank could come after the consumer for the difference.  However, they would be filing a lot of lawsuits and the legal fees would consume them.