Short Sale vs. Foreclosure
Homeowners facing foreclosure often wonder whether a short sale is a better alternative to foreclosure. The answer depends on who's asking. Foreclosures and short sales affect people differently, depending on their financial situations, priorities, goals, adversity towards risks, property condition, market conditions, and many other considerations. To help you answer that question yourself, here are some factors to consider provided by the California Association of REALTORS (C.A.R.) when choosing between a foreclosure and a short sale.
| Factors | Foreclosure | Short Sale |
|---|---|---|
| Definition | If you default on your loan, foreclosure is the legal process that your lender may use to sell your property to satisfy the debt you owe. | A short sale is a sales transaction where the sellers lender voluntarily agrees to receive a loan payoff for less than what is owed. |
| Credit | Foreclosures and Short Sales have the same negative impact on your FICO scores, according to www.myFICO.com. The derogatory item stays on your credit for 7 years, but your FICO score may improve after 2 years if you keep your other credit obligations in good standing. Aside from your FICO score, whether a foreclosure or short sale is better for your overall credit worthiness depends on the purpose for which you are using your credit- such as a mortgage, auto loan, credit card, apartment rental or job application (see right column for short sale) | A Short Sale may be reflected in your credit as an account that is "not paid as agreed" or "settled for less", and has the same negative impact as a foreclosure on your FICO score as a foreclosure according to www.myFICO.com. However, a short sale may be better than a foreclosure for obtaining a new mortgage loan under current Fannie Mae guidelines. According to Fannie Mae, only 2 years must lapse after a short sale for a borrower to show re-established credit, whereas 5 years must lapse after foreclosure (or 3 years after a foreclosure if borrower has a hardship). |
| Tax | Cancellation of Debt: Foreclosure may give rise to taxable income to you for cancellation of a debt, which is roughly calculated as your loan balance minus your property's fair market value as foreclosure. Certain exceptions apply such as bankruptcy, insolvency, forgiveness of a non-recourse loan (IRS), and a loan for purchasing or substantially improving your qualified personal residence. Capital Gains: Foreclosure may also give rise to taxable income for capital gains, which is roughly calculated as your loan balance (or the fair market value) minus your original purchase price and major improvement costs. However, you generally do not have to pay taxes on capital gains up to $250,000 (or $500,000 for married couples filing joint returns) if you owned and used the property as your principal residence for at least 2 of the last 5 years. |
Cancellation of Debt: As with a foreclosure, a short sale may give rise to taxable income for cancellation of debt, but the calculation is different. For a short sale, the cancellation of debt income is roughly your loan balance minus the sales price. Certain exceptions apply such as bankruptcy, insolvency, and a loan for purchasing or substantially improving your qualified personal residence. Capital Gains: As with foreclosure, a short sale may give rise to taxable income for capital gains, but the calculation is different. For a short sale, the capital gains calculation is roughly your selling price minus your original purchase price and major improvement costs. As with a foreclosure, you generally do not have to pay taxes on capital gains up to $250,000 (or $500,000 for married couples filing joint returns) if you owned and used the property as your principal residence for at least 2 of the last 5 years. |
| Personal Liability | If your loan balance is more than the foreclosure sales price, you generally will not be personally liable for the difference under certain circumstances, such as the lender forecloses non-judicially through a trustee's sale or if you have a purchase money, owner-occupied loan for one-to-four units. Certain exceptions apply, such as loan fraud, intentional property damage, certain wiped-out junior liens, and FHA and VA loans. | If your loan balance is more than the sales price of your property, whether you'll be personally liable for the difference may depend on what you negotiate with your mortgage lender. Your lender may agree to forgive you for the shortfall, refuse to forgive you for the shortfall, require you to pay the shortfall, or say nothing about the shortfall. If the lender agrees to forgive you for the shortfall, make sure to get that agreement in writing and signed by the lender. |
| Possession | You generally have the right to stay in your home during the foreclosure process which takes about 4 to 5 months. If you do not leave after a trustee's sale of the property, the new owner may negotiate a cash for keys agreement with you, commence the eviction proceedings by serving a notice to vacate, or take some other action. | You generally have the right to stay in your home until you close escrow on a short sale transaction. You may, however, be able to negotiate with your buyer for a longer or shorter stay. |
| Personal Concerns | The foreclosure process does not take much effort on your part, but wait can be agonizing and stressful for certain people. Although non-judicial foreclosures take about 4-5 months, you generally cannot dictate how quickly a lender will proceed with each step during the foreclosure timeline. You may also feel uncomfortable with what you may perceive as the shame or the stigma associated with a foreclosure, such as when a notice of trustee's sale is posted on your property or the sheriff comes to escort you and your family out of the property. | Doing a short sale may take a of of time, effort, and paperwork on your part to list and market your home, to get your lenders approval, and to consummate the sale with your buyer. Yet, during this process, you generally do not know whether you will succeed in closing your short sale transaction. Despite the hard work and uncertainty, you may prefer the short sale because it allows you to take a proactive approach to finalizing this chapter of your life so you can move on to the next one as quickly as possible. |
| Assistance | To assist you, a foreclosure consultant as defined by Cal. Civ. Code 2945.45 must be registered with the California Department of Justice and bonded for $100,000. Real Estate licensees are generally exempt from this requirement. To check with whether someone is registered as a foreclosure consultant, call the California Attorney General's Office. | One big advantage of a short sale is that you hire a professional real estate agent/REALTOR to help you through what can otherwise be a complicated and difficult process. Please take a minute to check out the short sale process sop you can see what is involved. |
Some information provided in the Foreclosure Help section of this website is provided by - 1) Copyright 2010 CALIFORNIA ASSOCIATIONS OF REALTORS® (C.A.R.) The information contained herein is believed to be accurate as of May 24,2010. It is intended to provide general answers to general questions and is not intended as a substitute for individual legal advice. Advice in specific situations may differ depending upon a wide variety of factors. Therefore readers with specific legal questions should seek the advice of an attorney. Permission is granted to C.A.R. members only to reproduce material for non-commercial purposes (personal use and to distribute to clients). C.A.R. members must reprint the material in its entirety, but may add their own names and contact information where specified. 2) Some information courtesy of Creative Commons License
Helpful Links
If You Decide To Sell...
No one in our area does more to market homes for sale in our area. Take a look at our marketing and compare what we do to other agents. More exposure can mean more buyers. More buyers can lead to more offers, higher prices, better deals, and faster closings.
(707) 853-4864