Do you have an underwater mortgage? Are you facing financial stress? We empathize and understand how that can be. Are you considering short-selling versus foreclosing? We are here today to tell you the difference between the two and hopefully help you make an educated decision in this market on what is right for you and your family and your future financial health.
Knowing the difference can save you a good deal of stress and anxiety when determining the right path to take regarding your financial situation and your home and can help you take the least costly path available.
The Difference Between Short Sale and Foreclosure
The main difference between a short sale and a foreclosure is the deficiency judgment. A deficiency judgment is a finding by the courts that the seller is responsible for any amount of money the financer (bank or mortgage company) incurs. There are states known as recourse states, such as Nevada, that allow the bank to collect from you these losses in a deficiency judgment. Those losses can include the difference between what your property sells for and what you owe as well as any commissions and closing costs that the bank has to pay on your behalf when you move out of the property as well as any repairs that need to be done. A deficiency judgment can cost the home owner anywhere between $100,000 and $500,000 in current market conditions.
A short sale is different than a foreclosure in that the homeowner is not necessarily given a deficiency judgment. When you short sale your home with an experienced real estate agent such as those with The Bachelor Group, you will not receive a deficiency judgment. We negotiate through the process with your bank to get you in writing what’s called the deficiency waiver. A deficiency waiver is a document the bank gives you that says that they waive the right in the future to collect on a deficiency judgment. That is the biggest difference between a short sale and a foreclosure and is one which makes the short sale an attractive option for those who are facing foreclosure in the near term.
The number two difference between a short sale and a foreclosure is your credit score. A short sale will have much less effect on your credit score than a foreclosure. A short sale will affect your credit score for anywhere between 12 and 18 months, and it can make a dent in your credit as low as 50 points. On the other hand if you foreclose on a property that will affect your credit for a minimum of three years and can drop your credit score anywhere from 200 to 400 points. This can have some serious ramifications to your financial health such as increased interest rates on credit cards or any other type of loan that can further negatively impact your ability to get back on your feet financially and avoid bankruptcy.
The third difference is your credit history. A short sale may not affect your credit history in regards to purchasing another home if you keep all your payments current while on a foreclosure the history is going to last seven years. This can have negative effect on things like future employment. Future employers may pull your credit and see if you’ve had a foreclosure on your credit to make an employment decision. This may also be the case for security clearances, liquor licenses, or gaming licenses all of which can be turned down because of a past foreclosure. With a short sale this will not be the case as it will not affect decisions on these matters.
Finally, there are taxes. There is a big difference in how short sales and foreclosures are treated by the IRS, so taxes are very important in considering a short sale versus a foreclosure. There is an advantage to short selling and taxes right now as if you complete a short sale on your home prior to December 31st, 2013 for your primary residence or an investment and you are insolvent, you are not required to pay taxes back to the IRS. The same thing can happen with a foreclosure, but the problem is that a foreclosure can take 12-18 months to happen which would be past the December 31st deadline, and you may have to end up paying taxes because of that.
Streamlining the Process
It should be obvious after reviewing these factors that a short sale may be the best option for you. We at The Batchelor Group are here to help you and take the financial of this situation. We’ll help to guide you through the process and hopefully help you make the correct decision for your family. When you use our agents to help you with a short sale, the bank pays all of your commissions, all of your closing costs, and you have our services for free. We also have a legal team that you have access to, to answer any of your questions at no cost to you. So if you have any questions, please call us, please let us help you, please have a free, confidential consultation with our office in any city you may be located in.
Key Points To Remember:
- A short sale can avoid a deficiency judgment with a deficiency waiver that protects the seller from liability to the bank of the difference in sale price.
- Short sales can have lessened effects on your credit score and credit history than foreclosures.
Short sales have big advantages over foreclosures in how they are treated by the IRS and taxes owed.
- The Batchelor Group is experienced in the short sale process and can help guide you to a successful short sale of your home.