Short Sale vs. Foreclosure

SHORT SALE vs. FORECLOSURE

 

Foreclosure: Foreclosure is the legal process by which a lender repossesses a property in which the borrower has defaulted on the payments.  Once the property is repossessed and sold by the bank, the borrower is liable for the bank’s losses.  The bank may therefore sue the borrower and go after his/her possessions (bank accounts, other property, cars, etc.) until the debt is repaid.  The main thing to keep in mind about a foreclosure is that your debt is not cancelled until you repay your debt.

 

Banks can sell your debt.  This will create a new activity on your credit report for the same debt.  Whoever acquires the debt (usually a debt collector) can also sell the debt to somebody else and so on.  Debt is eliminated from your credit report seven years following the last activity. If new activities are continuously created, that debt could stay on your credit report forever.

 

Banks are not the only ones foreclosing on properties. Homeowner Associations (HOAs) are doing it as well.  Other liens on your property may also create a potential foreclosure opportunity.  Due to the extreme number of foreclosures, the process of foreclosure is currently taking longer than usual, in some cases, up to several years.  This does not mean that the borrower has several years to decide what to do because the bank may choose to prioritize your property in the foreclosure process. In some cases, the bank may have already started the foreclosure process several years ago and the borrower simply does not know it.  Nevertheless, banks have realized that the foreclosure process can be very costly to them so they are willing to negotiate with the borrower to short sale the property.

 

Short Sale:  A short sale is basically a sale of a property where the sale price can’t cover the amount owed in the mortgage, representing a loss for the bank.  This loss is negotiated in the short sale process so the bank forgives the debt to the borrower and thus the borrower will have no further obligations with the bank.  Once the borrower’s debt is eliminated, he/she cannot be harassed by collection agencies and is not at risk of being sued by the bank in its effort to recover its losses, as in the case with foreclosures.

 

The short sale will appear on the borrower’s credit report as a paid debt thus allowing the borrower to apply for a new mortgage in as little as two years following the date of the short sale.

 

The bank’s loss becomes an income to the borrower. For example, if the bank had a $150,000 loss in a short sale, the borrower in question would have to declare the same amount as income in his/her tax returns (in addition to his/her wages and other income).  Nevertheless, the Mortgage Forgiveness Debt Relief Act of 2007 forgives this income and thus the borrower will not have to pay taxes on that amount.  This Relief Act is limited to primary residences; rental properties are ineligible for relief.  This Act has been extended through 2012, so if you are considering a short sale, you should not hesitate to initiate the process because it can take several months.

 

The main difference between short sale and a foreclosure is that in a short sale the debt with the bank could be fully eliminated (mainly on a first mortgage)  whereas under a foreclosure the debt may remain until fully repaid.

 

 

 

 

The following is a summary of the main aspects of each alternative:

 

Short Sale

Foreclosure

  •   The debt could   be eliminated
  •   Banks cannot   sue borrower for the amount owed
  •   Appears on   credit report as paid
  •   Property may be   purchased as soon as 2 years following short sale
  •   Borrower does   not have to declare a short sale on a future mortgage application
  •   Credit score   can be lowered as little as 50 points
  •   Short sale will   not show up on borrower’s credit and thus will not affect future employment   applications
  •   Borrower sells property

 

 

  •   Borrower’s debt   can stay until it is repaid
  •   Banks can sue borrower   for amount owed and can go after any bank accounts and/or other possessions to   collect debt (other property, cars, etc.)
  •   Appears on   credit report as Foreclosure and an unpaid debt
  •   Could stay on credit   report for up to 10 years, but the debt could stay longer
  •   Borrower has to   declare a foreclosure on a future mortgage application
  •   Credit score   can be lowered over 300 points
  •   Foreclosure   will show up on borrower’s credit and could affect future employment   applications
  •   Borrower loses property

 

The advantages of a short sale clearly outweigh those of a foreclosure.    Remember, a short sale does not necessarily guarantee an end to the foreclosure process.  If you are considering a short sale, you should initiate the process as soon as possible.

 

 

 

Please feel free to contact us for more details on this subject.

Boneli Real Estate & Management Group, LLC your Tampa Bay real estate consultant!