Buying a House? Read the Consequences of Foreclosure Vs. Short Sale

Consequences of Foreclosure Vs. Short Sale
Should you opt for foreclosure or short sale? Which one would prove to be more helpful in improving your credit rating? Read the following article to understand how they work.
WealthHow Staff
Last Updated: May 31, 2018
For those who have bought a house on loan and have to go in the list of defaulters of a bank as they cannot pay back the amount, it is a difficult phase. Apart from the fact that there is tremendous mental pressure and the feeling of having lost the home almost, there is also this roadblock as to how to proceed in the financial realm. In such a case there can be a dilemma in the minds of the homeowners as to what to do. Should they go ahead with the foreclosure or consider a short sale? Perhaps, the following paragraphs can help you make a decision.

Definition and Meaning

Foreclosure, in short, means an involuntary sale. It can mean you are selling your house through a trustee's sale or a sheriff's sale. In legal terms, it is a termination of equitable right of redemption of a person who has taken a mortgage on home, in case the borrower cannot pay off the debt.

On the other hand, short sale is a comparatively compact and short procedure. It involves the arranging of selling of a property at a lesser price than duly owed with the mortgage company. What then happens is that the bank or the financial institution forgives the remaining loan amount, i.e., when it is a typical short sale approval. It saves time and energy and the cost associated with the foreclosure and the whole process, which is very lengthy.


Consequences of Real Estate Short Sale
In this, the best part would be that the process will be totally in your control and the bank will not meddle in that affair. You will get an idea as to who is going to be a buyer, and most importantly, the foreclosure stigma would not be attached with your financial status. If you have never made any payment as late as 30 days past the due date, there is a chance that you can buy another home immediately, as per Fannie Mae guidelines. That is of course provided; the lender does not need you to pay back. Another very important outcome is that a short sale is not mentioned in your credit history. Even if it is, it is mentioned as settled or satisfactorily paid. Moreover, tax liability of a person is decreased as its consequence. But, if it has been successfully completed for an amount less than what the bank was ready to accept from the homeowner, the homeowner is solely responsible for tax on difference. That is one of the major tax implications with this method. However, if the payments are still in arrears and the lender agrees to a short sale, you can go for a Fannie Mae backed mortgage and that too in two years of the date of a short sale.

Consequences of Foreclosure
The first and foremost is that it will be a huge dent to a home owner's credit history and report. In fact, it will become a permanent public record and will be featured for minimum 10 years on a person's credit history. So, a homeowner's credit is affected negatively. Then, it is important to remember that a foreclosure sale will be taxed as per the deficit the homeowner has left on a property. If before this sale, the market value of the property decreases, most of the tax penalty is forgiven. Foreclosures reduce a consumer's credit score more than a short sale, and they will be subject to income tax liability. All this, in addition to collection activity from the lender on a mortgage balance.

Another issue regarding these two methods is that the tax consequences are dependent upon the loan being a recourse one or a non-recourse one. A recourse loan allows a lender to pursue the borrower for any shortfall, whereas in the latter, the lender has only one option, which is to take back the property for recovering the amount.

Apart from the aforementioned points, there are an umpteen number of considerations and aspects involved in both these processes, which are difficult to explain. It is advisable that you seek help from a financial adviser before considering any of the two.