How does a short sale differ from a foreclosure?

[noespahm]

I was psyching myself up to walk-away, but now my wife is having second thoughts and wants to look at other options.

I know the credit hit is worse....what about...

- Cancellation of Dept
- 2nd loan...(what happens to it?)
- Cost of selling (deal killer if significant)

From reading here I'm sort of biased to 'walk-away', but I want to make sure we covered all our options.

I guess I'm looking for reasons not to "walk-away".

Our numbers:
80/20
1st - 30yr fixed I0 10yrs - 330k
2nd - 30yr fixed - 80K
Comps - (exact models to ours) - 190k

Recent hardships: Reduction in pay, Car accident (minor), Car problems (major)...had to buy new car.

[lisasxr]

A short sale credit hit isn't any worse than a foreclosure hit. It does at least show that you made an attempt to get the lender funds owed without them having to go through the foreclosure process (which is lengthy and costly to the lender).

You will most likely still receive a 1099-C (Cancellation of debt). BUT, if you prepare your financials the day prior to the sale, you may find that you are insolvent and thus there would be not tax impact.

Depending on if the 2nd loan is recourse or non-recourse - they may have the option to pursue a judgement against you for the balance. Of Course, they may also just send you a 1099-C.

The bank will have to approve the costs of selling the home as it will mean less funds they get. But most likely, you wouldn't have to come up with cash to proceed.

[noespahm]

Originally Posted by lisasxr

A short sale credit hit isn't any worse than a foreclosure hit. It does at least show that you made an attempt to get the lender funds owed without them having to go through the foreclosure process (which is lengthy and costly to the lender).

You will most likely still receive a 1099-C (Cancellation of debt). BUT, if you prepare your financials the day prior to the sale, you may find that you are insolvent and thus there would be not tax impact.

Depending on if the 2nd loan is recourse or non-recourse - they may have the option to pursue a judgement against you for the balance. Of Course, they may also just send you a 1099-C.

The bank will have to approve the costs of selling the home as it will mean less funds they get. But most likely, you wouldn't have to come up with cash to proceed.

So is there ANY benefit to us for going through a short sale? It seems like a bigger hassle.

[HopingtoFind]

Originally Posted by noespahm

So is there ANY benefit to us for going through a short sale? It seems like a bigger hassle.

Of course there are benefits:

Your credit hit is not as bad with Short Sale as it is with Foreclosure.

According to Fannie May guidelines you could purcase another house after 1 1/2 to 2 years after Short sale as opposed to Foreclosure. After foreclosure you have to wait 5 years.

Your credit will recover sooner after Short Sale then after Foreclosure.

If your loans are recourse and/or your're in recourse state you have a chance to negotiate your ourcome and not have lender pursue deficiency.

The disadvantage is that is is not an easy process to go through and even after going through it there is no gurantee that short sale will be accepted.
Also, for the near future.. for 1 year or 2 your credit will be probably be in as bad a shape as if you have gone through a foreclosure.

[noespahm]

Originally Posted by HopingtoFind

Of course there are benefits:

Your credit hit is not as bad with Short Sale as it is with Foreclosure.

According to Fannie May guidelines you could purcase another house after 1 1/2 to 2 years after Short sale as opposed to Foreclosure. After foreclosure you have to wait 5 years.

Your credit will recover sooner after Short Sale then after Foreclosure.

If your loans are recourse and/or your're in recourse state you have a chance to negotiate your ourcome and not have lender pursue deficiency.

The disadvantage is that is is not an easy process to go through and even after going through it there is no gurantee that short sale will be accepted.
Also, for the near future.. for 1 year or 2 your credit will be probably be in as bad a shape as if you have gone through a foreclosure.

...ok the jist of it seems to be
- 3yrs faster credit recovery.

I'm in CA so both loans are non-recourse.
- Tax consequesences seem to be the same.

From what I've read, the biggest drawbacks is that it is a longer and more complicated process.


uggh....I was mentally set to walk-away and that was a hard place to get to....Now I guess I'll have to research Short Sales more..

I just wanted to get the mortgage off my shoulders quickly as possible and start paying off our other debt......the idea of free rent was appealing too.

[Fuzzy]

Also, understand that if you stop paying your mortgage your lender may choose to start the foreclosure process even if you are pursuing a short sale.

We stopped paying our mortgage and are pursuing a short sale but the foreclosure process is happening along side the short sale process. We have told our lender that we are not interested in keeping the house. Pretty much whichever process gets us to the finish line (no more house) first, wins!

[windnwaves]

Another benefit of a short sale is that it reduces the deficiency amount. In a foreclosure, the deficiency is considerably higher than in a short sale.