Foreclosure VS. Short Sale?

[Tbornetun]

Even if you are not filing BK, short sales are not beneficial at all to the homeowner. They are stressful and you will need to move sooner than if you forclosed through the regular process. As for hurting your credit, they both take a similar hit on the credit. Short sales don't show up as "loan paid in full" it shows a settlement amount. We forclosed 2.5 years ago, we were just approved for a 30 year fixed at 6.11%. Not bad, and we were able to stay in our other house for almost a year rent free. The only ones who benefit from short sales are eager real estate agents and the bank. We now advise all of our clients to go through with the foreclosure process and we include it on their bankruptcies. The trustee's in our area won't approve short sales either, they consider them harmful to the debtor.

[HHM]

But make no mistake, you are liable to pay income tax on the forgiven debt of a short sale, UNLESS you qualify as insolvent (See IRS Form 982), and the mortgage company WILL send you a 1099 (assuming the amount is over $600).

I think it's better to do the short sale. As someone else commented earlier...check the IRS guidelines because a lot of people are not being taxes or the debt even if they get a 1099. I think this might be good until 2010.

What's in it for the bank is it's cheaper to do a short sale than pay all the legal fees to foreclose. Most lawyers don't really know anything about other investor options so they will just tell you to give the house back or take the foreclosure.

At least with a short sale, your credit can recover because you only have late payments. With a Foreclosure, good luck trying to EVER buy another house with reasonable rates.

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I had to get rid of a lot of properties and lost a lot of equity in one deal, short saled some others, but at least I know my credit isn't going to stay screwed. The recovery time is more like 1-2 years instead of 10-20 years because of a foreclosure.

You have to be careful of what lawyers tell you to do. I have also found they only advise you to take the approach that requires the least amount of work for them (less paper work and quickest to ditch). You pay them one time and they don't want to do extract work to ADVISE you of other options that are ACTUALLY more beneficial to you.

Normally, I would have simply banned avb103, but this post is a great example of the fear mongering and simply wrong advice that is floating out there about foreclosure vs short sale. When it comes to credit reporting, there is absolutely no difference. You can go read FHA/HUD guidelines, guess what, it is the exact same 3 year requirement before you qualify for those federally back mortgages regardless if your short sell or foreclose. And every mortgage broker I have spoke with and interviewed on the subject agreed. Just because a short sale does not show up in the public records section doesn't mean a short sale is not on your credit report or cannot be figured out.

[Tbornetun]

With a Foreclosure, good luck trying to EVER buy another house with reasonable rates.

See above, I was just approved, 2.5 years after foreclosure 30 year fixed 6.11%. We close in two weeks on our new home. We have only been living in a rental for 2 years.

It can happen, and quickly. It is up to you to do whatever necessary to rebuild after a BK and/or Foreclosure.

[StartingOver08]

Tbornetun is exactly correct. The best way is SURRENDER the house in BK. Live out the property as long as you possibly can without paying - save funds - re-establish yourself beginning right away after discharge.

Loaning money is a business. The lenders are not going to "punish" you. They just want to know that the next loan made to you is going to be paid back. You are actually a better risk because you can not file BK again for a while!!

[Tbornetun]

Little more info...
We didn't file BK, we just went through the whole foreclosure process. People who also file BK may have a better chance at a better loan because of the fact that they cannot file again for a while.

[StartingOver08]

Little more info...
We didn't file BK, we just went through the whole foreclosure process. People who also file BK may have a better chance at a better loan because of the fact that they cannot file again for a while.

Sorry...but you are still right. It is better to go through the entire foreclosure process and get back on your feet afterward. You are living proof!

[Tbornetun]

I know!! I am so excited!! We have spent the past couple years lacking the confidence that we would be able to own our own home again. It is happening, WOOHOO!!

I wish people would realize that this isn't the end of the world, it is a new beginning.
Also, letting a house go is not failure, sometimes it is a wise business decision. Just like filing for BK, people feel as if they have failed in some way. The way to "win" is to make the decision to do something about it sooner than later. The sooner things are over with, the sooner you can get on with your life.

[r.m]

In order to get the short sale approved the homeowner must provide a CURRENT financial statement listing every asset and liability of the homeowner and each bank account number, location etc..

This requirement is typically waived in cases of BK.

Also they get a deficiency judgment on the difference (unless its a primary subject to the law referenced above - and there are several exceptions).

In what percentage of cases is this actually being done and do you have any documentation or source on this? If so, I would really like to know. IME, nobody's being chased, typically 1099's if anything.

And while we haven't seen it yet, I still suspect that this will be the next wave of debt collection.

[TEW]

Well tell you what I got a short sale on my house and what a hassle it is turning out to be.
It was my plans to stay here as long as I could rent free but family matter are dictating other wise.
The second bank wants my life history for what I don’t know they are included in the BK.
We are getting ready to sign a rent to own and now I have all this going on in the background.
I really feel like telling them to forget the whole thing. It is just not worth it. WF said they would give me cash for keys depending on the condition of the house after foreclosure. So if I short sell I don’t get that. I am really looking for a way out. It was a mistake.

[r.m]

Tell them to refer to the BK schedules, and ask them if they have any clue whatsoever as to how to handle a BK case.

No, forget that second part. But geewhiz, the people in this industry are plum idiots.

Was it a mistake?

Didn't it buy you a little extra time?

If so, then it should have made it worthwhile.

I don't know where you are on the timeline, but I'd echo the previous poster who suggested riding it out, particularly if you can't get the cooperation of BOTH lenders.

Don't spend money on housing until you have to... you will never have an opportunity to save money like this again. Help yourself, and help your family. That's why you filed in the first place, right? Give yourself the fresh start that you need, so you're never in this position again.

[PoorGrammyinBK7]

See above, I was just approved, 2.5 years after foreclosure 30 year fixed 6.11%. We close in two weeks on our new home. We have only been living in a rental for 2 years.

It can happen, and quickly. It is up to you to do whatever necessary to rebuild after a BK and/or Foreclosure.

This is great for you - gives me hope.

Our situation is that we said we would keep and pay. BUT, we were actually going to sign reaffirmation, but the CU never got the corrected ones to us to sign. So we did not reaffirm the 1st or 2nd mtg (or our 2 cars)!


So far, so good.....but we wonder how much worse the economy will get ... and if one day we will have to start missing payments on the house (always current up to now).

What happens in that situation, in any experiences you may have - if we should have to "walk away" , say in two or three years - or sooner?

I know it would foreclose and we won't be liable for a deficiency, but is this going to be even worse on our credit to foreclose some time AFTER the BK like that? And will it happen any sooner, or would we still possibly be able to live here rent free for up to a year? Anyone know?

[r.m]

What happens in that situation, in any experiences you may have - if we should have to "walk away" , say in two or three years - or sooner?

While I have no evidence whatsoever to back this up, I'm fairly convinced that the mortgage industry is going to have to re-write the social contract. Either they'll do it on their own, or they'll be forced to.

I don't have any reason to think that real housing values are going to revisit their 2005-2006 levels at any point in the next decade.

Of course, when the value of our currency plummets- which it will, with all the meddling that Bush, Bernanke and Paulson has done... AND what Obama will do- the price of homes may skyrocket, but in that scenario, it's because of inflation, not appreciation. So nominal prices may be higher, but real values, measured in today's dollars, will be lower.

Believe it or not, the mortgage companies have improved options SUBSTANTIALLY for homeowners in default. If you think it's tough today dealing with the mortgage company (which it still is), you wouldn't have lasted a day in 03-04.

We already have a substantial amount of homeowners underwater, and that number will increase substantially in the coming years. On that basis, the problem of underwater mortgages will be addressed at some point. It may take a few years, but their hand is going to be forced.

What you must do is look at your current circumstances and decide now if you're willing to take the risk that this theory is wrong.

[keepswimming]

I am new to this forum, and appreciate all I have read so far.

My husband and I are considering filing BK. (first time I ever thought I could say that!
We are out of options.
65K unsecured debt, primarily business inventory we bought w Credit Cards (dumb!). Of course the business is pretty much nonexistent now due to many factors
Income has dropped in half and I have not found work in six months
Our church has been helping us the past four months or so by making our house payment nad food, etc..., but we cannot keep going to them.
We filed with a settlement company in June. Not sure we can keep that up.

BK is looking like our only option. But we also want to move so we can be an an area with more opportunity. Our home has most likely become worth less that the mortgage balance. I cannot imagine a foreclosure, but it may happen. If we file BK before we are able to move, or before a FC process would begin, how would that affect things?

I just sent for the paper work to begin a loan modification trial period with mortgage.

I know I really cannot plan the order of things at this point, but just wonder what ramifications are, and things I should try to be aware of as shoes begin to fall.

Thanks in advance.

[flower04]

This is a great post. I think it should be a sticky. It has answered my question about DIL (we were seriously considering) and complety settled my "short sale vs walking away" conflict. Our attorney advised us to just walk away and surrender.
For some reason, I just can't reconcile it. I feel like if we do a short sale it will 'look' better but after reading this, I'm convinced that it wont make a difference on our credit and could be more stress than the foreclosure is already and those who I care about in the area will understand our situation if the question should arise down the road.

[keepswimming]

It is a little frustrating to see the banks always coming out "ok." Eight years ago, we were making two house payments. One on the home we moved from while in escrow, and a few months later we started payments on another house in another state. The first home ended up being in escrow three times in the course of a year before we sold it on contract. WaMu would NOT budge even for a few hundred or a thousand dollars to help get that house closed. Meanwhile we made the payment (how, i have NO idea other than racking up credit) for that entire year. It was the most stressful, unhealthy thing we have we have ever done. WaMu got all of their money. WOuld not work with us in any way.

Fast forward to years later, after we started to dig ourselves out, and we get to see all the banks get their money and run ie "bailouts"...Just does not seem fair at all.

I just feel a little duped as an American consumer who has always tried to do the right thing. Starting to feel like it really does not pay off.

Now as we face another crossroad in our life, wondering how to make it work, considering the housing market gamble and the state of affairs. Ug.

Sorry for the ramble. Just overwhelmed. Stuck.