Foreclosure or Short Sale, which is best

Should a seller go through the short sale process rather than letting their house be foreclosed on? 

Every client’s circumstances are different, but in almost all examples in which a potential seller is considering whether they should short sell their home or let it go through the foreclosure process, a short sale is typically the better option.

Short Sale

Mr. Jones owns a home with a mortgage balance of $200,000 and a current market value of $130,000. Mr. Jones elects to short sell his property. His Agent successfully obtains a buyer who offers a price of $104,000 (80% current market value).  After reviewing the buyers offer and the financial hardship information from Mr. Jones, his bank agrees to accept the short payoff of $104,000 which would leave a shortage of a balance of $100,000.

The transaction closes and Mr. Jones then pulls his credit report 30 days after the transaction takes place. On the report he notices that the mortgage trade line states “Mortgage debt was settled for less than full” but the balance on the mortgage is -0- . Mr. Jones is at least on the road to economic recovery.

Foreclosure

Using the same example as above, Mr. Jones elects to forgo the short sale process and lets the bank foreclose on his property.  The bank holding his mortgage initiates the proper legal procedures to foreclose on the property, all of which are costly to the bank and Mr. jones.  Mr. Jones is notified and his property is foreclosed on.

After about 6 months, the bank sells Mr. Jones’ house for much less than they would have with a short sale.  Now the bank has a deficiency liability on the house and Mr. Jones pulls his credit report 30 days after being notified that the bank has sold his property.

When looking at the report Mr. Jones notices the mortgage trade line shows “Foreclosure” and a large balance owed. Because of Mr. Jones’ choice of foreclosure, the road to economic recovery is in jeopardy and there is much more ground to make up. He not only has a foreclosure on his credit report but now has a much larger deficiency balance in which the bank will report on his credit report as a “balance owed.” 

Short sales are typically the better option in the long run for sellers to maintain better credit reporting and economic recovery down the road.

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