Foreclosure or Short Sale?

Thinking about a short sale vs. a foreclosure? If you, like many other Americans right now, are coping with a challenge to meet your mortgage payment. This may be due to one or a combination of these very common struggles:

1. Job loss
2. Increasing rates if you are in an ARM loan
3. Decreasing home values

It is most likely that you are deeply concerned with how either of these ugly terms will affect your credit score and which one may be the better choice of the two burdens. Instead of being intimidated, you are at least getting educated on your choices and the consequences. Though the reality of a short sale or foreclosure is not positive, researching what you will face is a good start to finding the best solution to your individual situation.

With a short sale, lenders typically take a loss on a loan that reflects the difference between what you owe and what the property actually sells for. They must be willing to accept this level of risk, and may execute one of two actions in a short sale:

1. Sue you, the homeowner, for the difference; reflecting on your credit as a deficiency judgment which could profoundly impact your credit score in a negative way, or
2. If they choose not to sue, they very well could absorb the loss, show it as a tax write off, the IRS would see this as a taxable event, and you would receive a 1099. You would then be taxed based on the difference of the lender's loss. This could prove to be extremely costly; however there would be no deficiency judgment showing on your credit. Now, if you're talking about your primary residence, then this should be forgiven up until 2012 (Consult your tax professional).

If your mortgage payments are current, and you foresee issues with your ability to continue, then being pro-active with the short-sale process can significantly help you, reducing your need for credit repair. Partnered with being current, if you have available assets to pay the difference within your short sale, then there should be no need for negative effect to your credit, and no need for credit repair. Since you are in control of the sale, on top of your mortgage payments, and could pay the difference out of pocket, this may not be handled as an actual foreclosure. Hence this would be the perfect solution.

Now, a foreclosure is exactly what it is. You have fallen behind in your mortgage payments; you cannot sell your home due to housing market conditions and have chosen to walk away. A completed foreclosure can stay on your credit for up to 7 years and can literally sink your credit scores. Your credit score could potentially drop anywhere from 100 to250 points; severely impairing your credit. If you are forced into a short sale, behind on your payments, and are unable to pay the difference, this short sale could reflect on your credit just the same as a foreclosure would. Post foreclosure, many people find that the lender continues to report negative information on their credit report. This can be corrected, as it is post foreclosure/short sale. You can attempt to correct yourself, or find a licensed credit repair agency to assist you.

Either situation that confronts you, whether it is after your foreclosure or a deficiency judgment from a short sale, the key to recovering from this successfully, is the determination to repair your credit once the damage is done. With your positive actions, commitment and patience you can fix your credit, and the dream of becoming a homeowner once again could someday become a reality.