Short Sale vs Foreclosure State Law vs Federal Law

Mortgage debt relief act expires , Forclosures, Short Sales Any homeowners end up having to choose between foreclosures and short sales. In order to make the right decision, a borrower should weigh the pros and cons of each scenario. The following information highlights the most important differences between a short sale and a foreclosure.

Effect on Credit Rating and Credit Score

A short sale is often sought by a homeowner who would like to avoid the stigma of a foreclosure. The biggest drawback of a foreclosure is the black mark that it leaves on a person’s credit rating. Indeed, a foreclosure can bring down a FICO score by a whopping 200 to 300 points. A short sale, on the other hand, usually brings it down by approximately 50 to 130 points. A foreclosure shows up as such on a person’s credit history; a short sale shows up as “settled for less” or a similar designation. No matter what, a foreclosure will negatively impact a borrower’s credit quite severely; unless a mortgage was already severely in default, though, the negative consequences of a short sale on a borrower’s credit rating is far less severe than a foreclosure.

Effect on Future Home Loans

With a foreclosure or a short sale, most borrowers cross their fingers for a new start. In either case, they will need a new place to live. As a result, they may need to apply for a new home loan at some point. When filling out most loan applications, a borrower is required by law to disclose any foreclosures from the past seven years. Since a short sale appears as a home sale, though, it does not have to be disclosed at all on a loan application. This can help swing the balance in a loan applicant’s favor, making it possible to buy a new home sooner if and when your personal circumstances improve.

Effect on Eviction

In the event that a foreclosure goes through to completion, the borrower generally has to vacate the premises immediately or very shortly after the foreclosure sale is finalized, depending on the legal process in your state. Ignoring notices to vacate the house result in actual eviction where you and your family will be escorted out of your home by law enforcement as the locks are changed, leaving your family stranded. You will then be at the mercy of the new owner to remove your belongings, and may also have to deal with the consequences of having an unlawful detainer (i.e. eviction action) come up on background screenings when trying to rent a new home. If nothing else, the short sale process can postpone the eventuality of foreclosure, avoid the ugliness of forced displacement and give homeowners extra time to come up with new plans.

Control of the Process

During the foreclosure process, all of the control is in the hands of the bank or other lender. The borrower’s hands are basically tied and the process unfolds according to the lender’s terms. With a short sale, though, a borrower has a lot more control over the process and a tremendous amount of input to affect a positive decision. Assuming the short sale is approved, the borrower can avoid foreclosure and drastically reduce the negative impact that the situation has on their credit history. In other words, a real estate short sale is a much more proactive way to handle the situation.