Mortgages

Which Is Worst: Short Selling or Foreclosure?

Facing Foreclosure with A Sea of Mail
There may come a time in your life when you just can’t hold on to your house anymore. The economy is bad, and it’s questionable whether it will recover any time soon. You basically have two options open to you: short selling and foreclosure. Before you act, make sure you understand what you’re getting into with either option.

 Short Selling

Short selling refers to the practice of selling your home and collecting proceeds that fall short of your current mortgage balance. For example, if the balance left on your home is $250,000, but you can only sell the house for $150,000, you would be selling your home short. You would still owe the bank $100,000.

 Foreclosure

Foreclosure involves letting the bank sell your home for you. Unlike short selling, the bank handles all of the details. You may still owe the bank money after it forecloses on you. The bank will try to get top dollar for your home, and it may have an easier time of doing it than you. After all, the bank is motivated to recoup as much money as possible.

 Benefits

The benefit of a short sale is that you retain control over the entire process. You can sell the home for whatever price you want. Also, short sales don’t look as bad on your credit report. You may see a drop in your FICO score, but the mortgage may only say “settled for less than the full amount” or simply “paid in full for less than agreed.”

The benefits of foreclosure are few. One thing you do get is closure. The bank will stop harassing you once you’ve given the home back. It will also handle the sale which may eliminate the stress of having to find a buyer and managing the whole process yourself.

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 Disadvantages

The disadvantage of short selling is that you will end up with a derogatory mark on your credit report. This won’t look as bad as a foreclosure, but it will impact any attempts to obtain credit in the future. Also, you still owe whatever is left unpaid. If you don’t’ pay it, the bank can come after you until you’ve paid off the mortgage in full.

The disadvantage to a foreclosure is that you’ll basically ruin your credit for the next seven years. While a bank is motivated to recoup as much money as possible, it may decide that the time involved in listing the house and selling it is not worth waiting for the “right buyer.” It may decide to sell the home as quickly as possible and go after you for the remainder. The bank still gets the money from the sale of the home either way, but you will end up with a “foreclosure” notation on your credit report and a bank chasing you around for the remainder of the money you owe.

 Consideration

In most situations, it makes sense to do a short sale, if possible. While this takes more work on your part, you’ll walk away with a cleaner credit report. Foreclosure should only be considered as a last resort. Either way, the result is the same: you’ll end up losing your home. The only difference is in how bad it looks on your credit report.

Guest post contributed by Sandy Attwood, on behalf of Lawyers.com. Sandy is a tax lawyer and in her spare time she enjoys writing about various topics but has a particular interest in the real estate market.

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