A short sale is by far the best option. It’s the easier softer way compared to a foreclosure. A few reasons…
Effects On Your Credit
Your credit gets hit equally hard by 200-300 points initially after a foreclosure and a short sale, but your credit rebuilds much faster after a short sale (2-3 years) compared to a foreclosure (5-7 years).
On most loan applications (house, car, credit card, etc.), there’s a question. Have you ever been foreclosed? You can honestly check mark no. If you check mark yes, you can be rejected for the loan or pay a higher interest rate.
There are two points of view when a potential future lender (home, car, credit card, etc) looks back at this event in your life. If you chose foreclosure, it says life happened, I couldn’t pay my debt, I stiffed the lender, and I did nothing to resolve the matter. If you chose short sale, it says life happened, I could not pay my debt but I took steps to resolve the situation by selling the asset and paid back as much as the debt as possible. This is why short sale looks better on your credit report and is favored by all future lenders.
In regards to your taxes:
- November 2007, President Bush signed into law H.R. 3648, The Mortgage Debt Relief Act of 2007. It prevents the IRS from treating forgiven debt like income. This law covers short sale transactions through the end of 2012.
- April 2010, California passed SB 401 which has the same effect as the IRS law through the end of 2012.
Each person’s tax situation is different. You need to check with your tax adviser/CPA to determine the exact effects of a short sale on your taxes!
In regards to possible deficiency judgments:
- October 2010, California passed SB 931 gives peace of mind to homeowners selling their homes through a short sale process by protecting borrowers from allowing the first mortgagor to pursue a deficiency judgment, after approving the short sale payoff. It applies to purchase money and hard money loans. It applies to closings after January 1st, 2011, for one- to four- unit dwellings, of which are either owner or non-owner occupied.
- July 2011, California passed SB 458 which builds on SB 931 mentioned above. This bill prohibits junior lien holders from pursuing deficiencies after a short sale closes.
Consult an attorney in your state to determine deficiency laws in your specific state prior to any foreclosure prevention strategy.
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