Your Reasons to Choose Short Sale Over Foreclosure
November 22, 2017
Foreclosure is a nightmare for any homeowner. No one wants it, but the economic recession and financial hardships can make it hard to keep the house and property foreclosure might be your last option. However, the foreclosure does not put an end to your problems because it is not a one-off event. It may haunt you for several years. Two alternatives to foreclosure are:
- A short sale
- Deed in Lieu of Foreclosure
What Is a Deed in Lieu of Foreclosure?
This is a loan negotiation process in which:
- The borrower transfers the title of the property to the lender
- The lender cancels the foreclosure
The critical point from the homeowner side is that the agreement should have a clause about deficiency waiving. If the lender refuses to include deficiency waiver, then the bank can sue you for the difference between loan amount and the fair market value of the property.
What is a short sale?
A short sale is a sale of property in which the total debt on a property is more than its selling value. The borrower sells the house at a discount price. A short-sale is possible with the permission of the bank. A short-sale is better than a foreclosure, and there are benefits for both the lender and the borrower in a short-sale.
WHY WILL THE LENDER ACCEPT SHORT SALE OVER FORECLOSURE?
There are many reasons the lender will prefer a short sale over foreclosure. If the house sells, the bank will get its majority of the loan back with the following additional benefits.
- The foreclosure has additional costs. The lender can save these expenses.
- Saving time: on average foreclosure takes at least two times more than the short sale
- A short sale will rescue the bank from the hassle of selling the property.
- Time is money for the bank. The sooner they get their money back, the sooner they can lend it again to make a profit.
- There might be tax benefits for the lender as the deficiency balance is a cancellation of debt income for the bank.
Benefits of a Short Sale
In comparison to a foreclosure there are many benefits of a short sale:
- Avoid social stigma of the foreclosure and sell your house with grace.
- End of mortgage payments.
- You will be eligible to buy another home in two years instead of five to seven years.
- All debts will be settled or re-negotiated. If you get a deficiency waiver, the balance of your debt is forgiven.
- Foreclosure has a more significant impact on your credit than a short sale.
- You can start fresh after a short sale. The stress of mortgage payments and the fear of foreclosure will end. It is a quick process as compared to other routes.
The Effect of Short Sale on Your Credit Report
The effect of the short sale on your credit report depends upon how the lender reports your debt. If the lender reports it as “paid” your credit score will be okay. As this is rarely the case, so you have to negotiate with the lender before going for a short sale.
Avoiding deficiency judgment after short sale
In Texas, if the amount you owe is higher than the sale amount of the property the lender might sue you after a short sale or a deed in lieu of foreclosure. No law in Texas can save you from a deficiency judgment. Only possible way to avoid it is that your agreement with the lender states that the lender is waiving his deficiency judgment right. If this is not written then the short sale or deed in lieu of foreclosure will merely become a foreclosure, and you have to pay the remaining balance.
Avoiding tax consequences after a short sale
The IRS treats any forgiven debt as taxable income, and this amount is subject to regular income tax. The Mortgage Forgiveness Debt Relief Act of 2007 has some exceptions for up to 2016 written agreements. Filing for bankruptcy can be a viable but last option in some cases. You have to consult a competent tax attorney to avoid any problems at tax time.