The question that I hear quite often from clients that are upside down on their mortgage is; Should I Short Sale my home or let it go to foreclosure? Unfortunately, this dilemma is all too common these days. The answer depends on your individual situation. The following are criteria I've compiled from various sources that I think are the most important to consider when making this decision. For details regarding any tax implications you should ask your tax professional.
Advantages of a Short Sale
- More Time In Home: The short sale process can take many months to complete, and will likely give you more time in your home.
- Credit score may be harmed less than a foreclosure: Realtors are taught that a short sale will be less harmful to your credit score than letting it go to foreclosure. This may or may not be true. There seem to be contradicting information out there about this, and I’ve seen studies that show it does NOT make a difference.
- You may miss out on the Mortgage Forgiveness Debt Relief Act: In the past, the amount of debt that is forgiven by the lender in a short sale was considered taxable income. The Mortgage Forgiveness Debt Relief Act, which expires at the end of 2012 prevents this. Of course the congress could always extend it, but that’s not something you want bet on. Again, check with your tax professional as to your individual situation.
- Control: A short sale gives you control over when you leave the house, as opposed just waiting for the knock on the door.
- No Cost To You: A Short sale doesn’t cost you anything. The Realtor commission and closing costs are paid by the lender
- Future Job or Rental Applications: Most employers and landlords will ask if you have had a foreclosure, but they typically won’t ask if you have had a short sale. It’s a nice thing to NOT have to check that box indicating you had a foreclosure.
Buying Another home:
- It is easier to get a loan to buy another home in the future with a short sale on your record as opposed to a foreclosure. A short sale tells the lender that at least you tried to resolve the situation as opposed to just giving up and staying in the home as long as you could. This is a relative positive.
- FHA financing normally requires THREE years from the short sale, but their are some scenarios where you could buy a home the next day. Check with your lender to see what your situation is.
- Conforming loan guidelines state a minimum of TWO years and 20% down; however, if the short sale was due to "extenuating circumstances" (divorce, medical, job loss, death of a wage earner, etc.) then you only need 10% down.
- Security Clearance: A foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. A Short Sale does not have this affect
Disadvantages of a Short Sale
- Selling your home can be a pain and there is no guarantee that your lender will sign off on the short sale.
- If you wait until after 2012, the amount of debt forgiven could be considered taxable income. Talk to your tax professional about this.
Advantages of letting your house go to Foreclosure
- You may be able to stay in your home for a long time rent free. There is certainly no guarantee of this. It depends on the lender as to how long it will take. I know people that have been in their homes for more than two years and still have not received a foreclosure notice. The trick here is to keep the outside of your home looking nice. When you stop making payments, eventually the lender will get a price opinion on your home, and this will include pictures of the outside. If it looks like you are taking care of the house, then It is likely they will put your file at the bottom of their pile, as they will want to focus on properties that have been abandoned.
- You Don’t Have to Deal With Selling It. Again, selling a home is a pain in the butt.
- Cash For Keys: Eventually, your house will be foreclosed on, and assuming your lender takes back possession of the home, you will be getting a knock on the door. It will likely be the Realtor that has been given the listing by lender. That Realtor will probably offer you what is known as Cash For Keys, which is money to help you move out, if you leave the house in good condition. You can negotiate this with the lender, but don’t expect a huge payday. I’ve seen up to $5000.
Disadvantages of Letting your house go to foreclosure
- It will be harder for you to get a loan for your next home as compared to a short sale
- You credit score may be more affected than a short sale, but again, that is unclear