Consequences of Foreclosure Vs. Short Sale

For those who have bought a house on loan and have to go in the list of defaulters of a bank as they cannot pay back the loan, it is a difficult phase to go through. Apart from the fact that there is tremendous mental pressure and the feeling of having lost the home, almost, there is also this roadblock as to what next. What next in the financial realm. In such a case there can be a dilemma in the minds of the homeowners as to what to do. Should they go ahead with the foreclosure or consider a short sale? Perhaps this article to follow can help you make the decision.

Foreclosure and Short Sale Explained

Commoners are not acquainted with short sale much, perhaps. Foreclosure is pretty common, though. Let's take a look at short sale vs. foreclosure, still.

Foreclosure
Foreclosure, in short, means an involuntary sale. It can mean you are selling your house through a trustee's sale or a sheriff's sale. In legal terms, it is a termination of equitable right of redemption of a person who has taken a mortgage on home, that is in case the borrower cannot pay off the debt.

Short Sale
As the name suggests, is a comparatively compact and short procedure. It involves the arranging of selling of a property at a lesser price than duly owed with the mortgage company. What then happens is that the bank or the financial institution forgives the remaining loan amount, that is when it is a typical short sale approval. It saves time and energy and cost associated with the consequences of foreclosure and the whole process, which is very lengthy.

Consequences of Foreclosure Vs. Real Estate Short Sale

Consequences of Real Estate Short Sale
In a short sale, the best part would be that the process will be totally in your control and the bank will not meddle in that affair. You will get an idea as to who is going to be the buyer and most importantly, the foreclosure stigma would not be attached with your financial status. If you have never made any payment as late as 30 days past the due date, there is a chance that you can buy another home immediately, as per Fannie Mae guidelines. That is of course provided the lender does not need you to pay back. Another very important consequence is that the short sale is not mentioned in your credit history. Even if it is, it is mentioned as settled or satisfactorily paid. Moreover, a tax liability of a person is decreased as consequence of a short sale. But, if it has been successfully completed for an amount less than what the bank was ready to accept from the homeowner, the homeowner is solely responsible for tax on difference. That is one of the major tax implications of a short sale. However if the payments are still in arrears and the lender agrees to a short sale, you can go for a Fannie Mae backed mortgage and that too in two years of the date of short sale.

Consequences of Foreclosure
The first and foremost is that it will be a huge dent to a home owner's credit history and report. The foreclosure will become a permanent public record and will be featured for minimum 10 years on a person's credit history. So a home owner's credit is affected negatively. Then it is important to remember that a foreclosure sale will be taxed as per the deficit the homeowner has left on a property. If before a foreclosure sale, the market value of the property decreases, most of the tax penalty is forgiven. Foreclosures reduce a consumer's credit score more than a short sale and they will be subject to income tax liability. All this in addition to collection activity from the lender on a mortgage balance.

Another issue regarding short sale and foreclosure is that the tax consequences are dependent upon the loan being a recourse loan or a non recourse one. A recourse loan allows a lender to pursue the borrower for any shortfall, whereas in a non recourse loan, the lender has only one option, that is to take back the property for recovering the loan.

That was all. There are an umpteen number of considerations and nitty gritties involved in short sale and foreclosure which are difficult to explain. Only a good legal and financial adviser can help you with that! All the best!