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How do I Decide Between a Short Sale and Foreclosure?

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  • Written By: Ken Black
  • Edited By: Andrew Jones
  • Last Modified Date: 12 November 2016
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Deciding between a short sale and foreclosure is one of the most difficult decisions any homeowner may ever have to face. One thing that may make that decision easier is considering the deal a lender is willing to accept. If a pre-foreclosure short sale is a possibility, it is almost always an advantage for the borrower to make that sale.

The most important feedback when choosing between a short sale and foreclosure will be what the lender is offering. Specifically, a borrower needs to ask how the matter will be reported to a credit agency. If the lender is willing to list the debt as paid in full, this will not be a mark against the borrower. If, however, the lender marks the debt as settled for less than the amount owed, there will be negative consequences on the borrower's credit. Whatever the lender is planning to do, it should be put into writing before the borrower makes any decision.

These negative consequences will not be the sole determining factor in choosing between a short sale and foreclosure. Even such a designation on the credit is not as bad as a foreclosure. Thus, in most cases, a short sale will usually be a better option for those looking to protect their crediting rating as much as possible.

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Another matter to consider when choosing between a short sale and foreclosure is whose terms the borrower would like to leave under. If engaging in a short sale, the lender may offer some leniency in getting moved out, giving the borrower the freedom to move out at a more convenient time. A foreclosure will give the borrower no such leniency. Once the foreclosure is processed, the borrower will have to vacate the home, usually within 30 days.

There may be some limited situations where an individual may not choose a short sale and risk the foreclosure. For example, some borrowers may feel they will be able to come up with the money, but may need every last minute to produce it. In some cases, the borrower and his or her family may simply not have anywhere else to go. Faced with homelessness, a foreclosure may seem like a better option, simply because it will put off the situation as long as possible.

Both a short sale and foreclosure have some negative consequences for the borrower. It is up to the individual to figure out which one may cause the least harm. In most cases, this will be a short sale. In the end, both decisions put the borrower in the position of losing the home.

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Melonlity
Post 2

@Soulfox -- in spite of all of that, a short sale is often the best issue for both credit reasons and the fact that the bank agrees to not come after you for the shortfall after foreclosure. If, for example, you owe $150,000 on your home and a bank forecloses on it and sells if for $100,000, the bank could come after you for the additional $50,000 (not always, but that has been known to happen).

If you are considering bankruptcy, things change a bit. The aforementioned shortfall can be discharged as an unsecured debt and you won't much care about what a foreclosure will do to your credit rating because the bankruptcy will pretty well ruin that, anyway.

Soulfox
Post 1

A major factor in determining whether a foreclosure or short sale is a good idea has to do with time. It takes a long time for a short sale to go through as all offers must be approved by the bank before the property can be sold. That means that the process bogs down should the bank not accept an offer, leaving the buyer in the position of either making another offer (which may or may not be rejected) or forgetting the whole thing and shopping for another home.

Why is time a problem? Because you've got to figure out where to live after your home is sold. For example, let's say you decide on the short sale route

and rent an apartment. You could potentially be looking at a situation where you are paying rent while dealing with a home sale. Meanwhile, if the property doesn't move at short sale for some reason, you will still be on the hook for your mortgage and will wind up still owing past due payments, penalties, interest and other charges that could result in a tidy sum.

Also, time is a problem for buyers. They want to make an offer, have it accepted quickly and then close the sale. Short sales generally move slowly and buyers have been known to run out of patience.

Then, of course, there are the tax consequences to consider. Let's say you owe $150,000 on your home and you do a short sale for $100,000. Guess what? You've benefited to the tune of $50,000 and that might be viewed as taxable income.

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