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FAQ: What are the effects of a Foreclosure vs a Short Sale on a Seller?

Posted by: raindrop 6 years, 5 months ago

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A short sale is a real estate sales transaction where the seller's lender voluntarily agrees to receive a loan payoff for less than what is owed.  In other words, a person sells their home for less than their mortgage balance.

What is a foreclosure? When a Seller defaults on their loan (does not comply with the terms of the loan, like making the monthly mortgage payment), foreclosure is the legal process that the lender must use to sell your property to satisfy the debt.  In other words, once the bank take over ownership of your home, it becomes a foreclosed home.

What are the credit consequences of a short sale or foreclosure? A foreclosure and short sale have the same negative impact on your credit score according to www.myfico.com.  The derogatory item stays on your credit for 7 years but your FICO score may begin to improve after 2 years if you keep your other credit obligations in good standing.  A short sale may be reflected on a Seller's credit score as an account that is "not paid as agreed" or settled for less.  However, a short sale may be better than a foreclosure for obtaining a new mortgage loan under current Fannie Mae guidelines.  According to Fannie Mae, only 2 years must lapse after a short sale for a borrower to show reestablished credit, whereas 5 years must lapse after a foreclosure.  For more information on the credit consequences of either a short sale or a foreclosure, contact a credit counselor.

What are the tax consequences of a short sale? As with any cancellation of debt, a short sale may give rise to a Seller's taxable income.  For a short sale, the cancellation of debt income is roughly your loan balance minus the sales price. Certain exceptions apply, such as bankruptcy, insolvency, and a loan for purchasing or substantially improving your qualified principal residence.

What are the tax consequences of a foreclosure? Foreclosure may give rise to taxable income to the Seller for cancelation of debt which, on a foreclosure, is calculated as your loan balance minus you property's fair market value at foreclosure.  Certain exceptions apply such as bankruptcy, insolvency, forgiveness of a non-recourse loan (IRS), and a loan for purchasing or substantially improving your qualified principal residence.

What are some personal concerns of a short sale? Doing a short sale may involve a lot of time, effort, and paperwork on your part to list and market your home, to get your lender's approval, and to consummate the sale with your buyer.  Yet, during this process, you generally do not know whether you will succeed in closing your short sale transaction.  Despite the hard work and uncertainty, you may prefer a short sale because it allows you to take a proactive approach to finalizing this chapter of your life so you can move on to the next one as quickly as possible.

What are some personal concerns of a foreclosure? The foreclosure process does not take much effort on your part, but the wait can be agonizing and stressful for certain people.  All non-judicial foreclosure takes a minimum of 4-5 months, you general cannot dictate how quickly the lender proceeds with each step of the foreclosure process.  You may also feel uncomfortable with what you may perceive as the shame or stigma associated with foreclosure, such as when a notice of trustee's sale is posted on your property or the sheriff comes to escort you and your family out of the property.

Where can a homeowner find help with a short sale? One big advantage of a short sale is that you can hire Kate Gillingham with Coronado Island Realty to help you through what can otherwise be a complicated and difficult process.

Where can a homeowner find help with a foreclosure? To assist you, a foreclosure consultant must be registered with the California Department of Justice and bonded for $100,000.  Real Estate Licensees are generally exempt from this requirement.  Contact Coronado Island Realty for a reference to a foreclosure consultant.

The information contained herein was provided by the California Association of Realtors(R) (C.A.R) and is believed to be accurate as of May 24, 2010.  It is intended to provide general answers to general questions and is not intended as a substitute for individual legal advice.  Advice in specific situations may differ depending upon a wide variety of factors.  Therefore, readers with specific legal questions should seek the advice of an attorney.


For a list of short sales in Coronado and San Diego or Coronado Island Foreclosures, contact Kate!

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