If you’re facing financial hardship and you’re a homeowner, you may be wondering what to do with your home and what the difference between a Short Sale Vs. Foreclosure will have on your credit, taxes, and lively hood in the near future. This is a common concern with many people in the United States today with so many homes underwater. The quick answer as to you considering a short sale of your home or allowing it to go into foreclosure depends on a lot of factors, so let’s get started.
Short Sale Vs. Foreclosure
First off let’s start with the benefits of a short sale vs. foreclosure. In a short sale you have the final say on what offers you will accept, although the bank has to approve the offer, you first get to choose which offer you want to submit to the bank. You also get to know who is actually buying your home. Some may say they don’t really care, but if you’re interested in knowing the future owner of your home, you’ll have that chance with a short sale.
You won’t have to worry about your neighbors and friends talking about you facing a foreclosure, which we all know, is not a fun topic to discuss. Although these days it’s not all that uncommon to be facing financial distress with the bum economy, it’s still not a great topic to have hovering over your head.
It’s also possible to remain current on your house payments while you’re seeking a short sale, unlike a foreclosure which won’t occur until you’ve missed quite a few payments. A short sale is exactly the same as selling any other home, and it just takes patience to wait for the bank to approve it. If you’ve ever dealt with a short sale, you know they are somewhat of a pain, but it’s still better than a sheriff coming to your home and kicking you to the curb like a foreclosure.
Quick Turn Around On Buying Another Home After Short Sale
In one of our examples above, I said that you could seek a short sale even though you aren’t missing payments. This is true, yet difficult, but there is a huge benefit to doing so.
It is possible to buy a home directly following a short sale if you don’t miss payments. You’ll have to do it quick before the short sale hits your credit, but it is possible.
I just had one of my agents do this very thing with one of her buyers about a week ago. Her buyers short sold their home in Texas and moved up here to buy a home. As soon as their short sale closed, they closed on their new home making it so their credit wouldn’t be effected in time to disrupt the new purchase.
There are some weird laws when it comes to the loan you want to use when buying another home directly after a short sale however. For example, finding a lender who would fund this loan is not easy, you’ll definitely have to do some shopping around to find one that will.
I do know that you can get an FHA loan immediately after a short sale, but there are some odd requirements such as being 600 miles away from the home you had to short sale. This is usually for people who have to relocate due to a job transfer or possibly military. So, don’t think you can just short sale your home to avoid foreclosure in order to buy the neighbors home down the street!
Buying A Home After Foreclosure – Is It Possible?
Buying a home after you have been foreclosed on is going to be a timely exercise. If you’re lucky, and you take care of your credit issues and start to regain some credit, you could potentially buy another home within 5 years after your foreclosure. This is only if the home was your primary residence, it doesn’t work if it was an investment home of a vacation property.
Typically, it’s going to take about 7 years for your to be eligible to buy another home, unless of course you pay with cash. This is true for most people, as it’s extremely difficult to fix everything and regain credit within 5 years from your foreclosure.
If your investment was foreclosure, you’re going to have to wait this 7 year period before you’ll be able to buy another investment or even another personal residence. This is the major downfall of foreclosure. The time frame to wait to buy another home is quite the deterrent.
Credit Affects Of A Short Sale
A short sale will have an affect on your credit, even if you don’t miss any payments. Lenders will report a “paid in full for less than agreed” or a “settled for less” on your report which means anyone who pulls your credit will know you’ve not been able to pay your mortgage. It can also drop your credit rating up to 130 points if you miss your payments depending on how far you get behind.
This is why it’s crucial to buy a home directly following a short sale if you plan to take that route, otherwise you’ll have to wait at least 3 years and potentially 7 years depending on the lender and the circumstances regarding your credit report.
Some banks are now moving towards the 7 year mark even after a short sale, as many homeowners were taking advantage and just walking away from a home to buy another one when they could still make the payments.
Credit Affects Of A Foreclosure
A foreclosure will have a larger affect on your credit than a short sale. This all depends on how many payments you missed and your previous credit history, but you could potentially see your score drop 160 points from a foreclosure. And, once it’s on your report, the foreclosure won’t be removed for 7 years. Which means, like I said above, it’s likely you won’t be able to buy another home for at least 7 years, if not more following a foreclosure.
Credit Reporting Following Short Sale
The way a bank reports a short sale varies from institution to institution, however a short sale is a negative no matter how it’s reported. A typical report will have something to the effect of “paid in full for less than agreed” while others will just show a charge off. The negative credit will stay on your report for 7 years, but you don’t necessarily have to report it which we will talk about in the next section.
Credit Reporting Following Foreclosure
A foreclosure on your credit report can affect not only you buying a home in the near future, but it can also affect your ability to get a job. Some employers pull credit, and although not likely, they could decide not to hire you based on a foreclosure. You’ll have have the negative effect on your report for the 7 year time period. A foreclosure will show as a charge off.
Short Sale Deficiency Judgments
A short sale deficiency judgment is the amount that is owed minus the amount the short sale was able to garner from the buyers. So if you owed $150,000 and the home sold for $120,000 that means you will have a deficiency of $30,000. Now, depending on your negotiation with the bank, you may not have to pay all or any of that. If the home is your personal residence, then most likely you won’t face a judgment, but if it’s an investment, you will almost certainly have to pay some of the deficiency amount once the home is sold.
Foreclosure Deficiency Judgments
This is pretty obvious. If you go into foreclosure, you will most definitely face a judgment. This can get really expensive. For example, even if your home sold for exactly the same amount you owed, you would still have to pay the legal fees and any other bank fees charged to sell your home. These fees could include repairs, Realtor fees the bank paid to sell the home, and of course any amount the bank couldn’t get back on the sell of your home.
Short Sale Tax Consequences
Due to the mortgage debt relief bill passed, up until 2012, you will not face any Federal tax consequences due to a short sale. You see, when you short sale your home, the amount that was owed minus the amount the home sold for is considered by the IRS to be income. So in our example above, the $30,000 would be subject to federal and state taxes.
The mortgage debt relief bill made it so you can’t be federally tax, but depending on your state, you could still end up being responsible for paying state taxes. You will be 1099′d by the bank, and if you don’t pay your taxes, again you will be facing more credit issue and possibly jail time, so be sure to talk to a tax accountant on your states laws in regards to short sale income tax.
Foreclosure Tax Consequences
Foreclosure falls under the same debt relief act that expires in 2012, but you still may get 1099′d buy the bank directly after the foreclosure. It all depends on your state if you will be taxed locally, and of course your best bet would be to talk to a tax accountant to determine if your state will force you to pay local taxes.
So, as you can see there are a lot of potential problems with both a short sale and foreclosure. So what’s the verdict? Who wins the short sale vs. foreclosure debate? Short sale wins every time. In all aspects, a short sale is more beneficial to you, the home owner, as well as the bank. It saves them money from legal fees and paying for the foreclosure process, and it also saves your credit report, potential taxes, and deficiency judgments.
If you’re facing a financial hardship and think you may need to seek a short sale, talk to a Realtor ASAP to get the process started. The faster the better. Don’t wait until the sheriff is knocking on your door to repossess your home. Nobody wants to lose their home, but a short sale will prevent many sleepless nights and the angst of a foreclosure. Best of luck!
The “National Housing Survey” and the “Myers Research and Strategic Services Survey” both found that people are buying Madison homes for reasons that aren’t necessarily related to money. However, when you find yourself in a conversation about real estate, people talk about the money involved in property.
