Short Sale v/s Foreclosure

What is a Short-Sale and a Foreclosure?
A defaulting home owner's lender, accepts a lesser compensation against the mortgaged estate and makes a sale. Such a sale is known as a short sale; one that falls 'short' of the actual value of the estate. On the other hand, a foreclosure involves a legal binding which denies the defaulter, the right to redeem the mortgaged estate. In a short sale, the proceeds generated on the sale of an estate are less than the actual value of the estate; and a foreclosure is simply the repossessing of an estate, if the owner is unable to make the abiding payments. Both the processes have their own set of difficulties. The wise option is to prefer the lesser of the two 'evils', which is short sale. Putting it briefly, short sale may be considered as a viable alternative to foreclosure.

Reasons to prefer Short Sale over Foreclosure
Foreclosure should be avoided at any cost. It simply means losing the mortgaged home that could have fetched a decent value. The provisions of a foreclosure can be severe if the law grants the lender, the authority to recover its dues. The liability for a defaulter can increase, if the authority adds the costs of the arrears foreclosing on the lender. Although, both the procedures severely impact the home owner's credit record, a foreclosure has more negative implications. A random and hasty selection may prove foreclosure as an easy way to end the agony. But careful inspection will prove otherwise. The current credit crisis in the world is a result of such haphazard action taken by borrowers.

A short sale record on the credit history, will at least enable the borrower to apply for an institution-backed loan in future, whereas a foreclosure will seal the chances of any help in the future. If a person opts for a foreclosure, there is an ineligibility status on the credit record for a period of 5 years. Short sale may be disastrous in consequences too, but only a year's ineligibility for making a short sale, a lesser price to pay. This is according to the prevailing law in the U.S since May 31, 2008.

Filing for bankruptcy is another good option, until it is substantially proven by the concerned party, that a foreclosure was due to a big emergency like severe health problems or a big accident. Short sale is a tedious process involving a lot of legal, financial and tax issues. However, given a choice, it would be more suitable than a foreclosure.

Another problem confronting the mortgagor is, what if there are a number of short sales due? Wouldn't foreclosure be a better option in such a situation? According to experts, a foreclosure should be considered as the last option, even in such cases. The amount for which a short sale or foreclosure is granted is considered as the mortgagor's income by the IRS (Internal Revenue Service). Therefore, the amount is taxable, resulting in further liabilities. Hence, a short sale is preferable in this case.

A simple arithmetic calculation showing the comparison of both is explained below.

If a house is mortgaged for $500,000 and foreclosed on $400,000, the bank commission, holding cost, loss of interest, attorney fee and the miscellaneous amount will sum up to a huge deficiency. This deficit will be filed against the borrower, by the lender. Thus, searching for an easy way out, becomes a headache!

Now, consider that a short sale is made for the same amount. The proceeds generated would certainly be more than $400,000. Along with this, there would be no attorney fee or holding cost. Overall, the deficit would be significantly low. Another advantage is that you can always negotiate on the short sale deficit.

The bottom line is to accept the responsibilities of your actions and face the consequences bravely. In extremely tough situations, a level-headed approach will definitely help.