^[1]If you are a homeowner who is thinking of getting foreclosed vs. trying a short sale, there is a wealth of information and Q&A’s available – click on the “Short Sales” button in the top border above. Get legal advice too.

Who should short-sale?

It’s uncertain, because there are questions without definitive answers until later:

Will your credit score take as big a hit as a foreclosure….?

Can get approved for a short sale? (maybe while current on payments?)

Can the lender be convinced to not pursue a deficiency judgement, and commit in writing?

Will future employers want to check your credit?

Will a short-sale be seen as more favorable with your future landlords?

It takes time and effort to procure a short sale.  If you don’t want to be bothered, then you are already approved for a foreclosure – enjoy the free-rent program for as long as it lasts, and know that you’ll have banged-up credit for the next seven years.  Recognize that the benefit is temporary, you’ll have to go back to paying rent again someday, and as a renter, you may be moving more often.  You may have to settle for an inferior house/neighborhood/lifestyle, but that might be a relief too?

Who should choose to short-sale?

1. If you need a security clearance for employment, or just generally enjoy your high FICO score now, your credit might get lucky by short-selling.  If the lender marks it somewhat favorably, like “paid as negotiated”m or even better, “paid as agreed”, it would be better than a foreclosure.
2. If you want to buy another house as soon as possible, then short-sell.  With an acceptable hardship, you might get approved for a new mortgage in 2-3 years if you can qualify full-doc, put 20% down, and have a decent FICO score .
3. If you have refinanced, the lenders have recourse.  If you are concerned about a deficiency judgement, try to get the lender to waive it during the short-sale process.  You won’t know for sure until you see it with your own two eyes, but worth a try.
4. If you bought the property as a rental (not your primary residence or vacation home), you could be liable for a deficiency judgement, even if it is purchase money.  A short-sale gives you a chance to plead your case for a waiver.
5. If you are financially or morally desperate and just want to work the system for as much as you can get, run the gamut.  Apply for the Loan-mod, Short-sale, Bankruptcy, and Foreclosure package and it will buy you 1-2 years (or more) of free-rent.  Don’t be surprised if future landlords frown on your tenant application.
6. If you want to manipulate who buys your house, and bargain for additional sweeteners, you can conspire with your agent to work the system – most are getting away with it for now.
7. If you are a realtor, you could make a commission short-selling your own house.

Who should choose foreclosure?

1. If you bought the home as ‘owner-occupied’ and still have the same one or two mortgages you used to purchase, then you don’t have to worry about any possible deficiency judgements, and are exempt from taxation on the debt relief (as long as you close by the end of 2012).  If none of the seven above apply to you, and prefer to slip out quietly in the night, foreclosure might be your best option.
2. If there is something wrong with the property, getting foreclosed avoids seller-disclosures.  If you destroy or vandalize the property, you may be liable if the lenders pursue it.
3. If you don’t want to divulge your financials (repeatedly), then foreclosure is for you.
4. If you don’t want the whole neighborhood to know while you are living there, then foreclosure is for you (as long as you can grab the door ornaments right away).

For those who are over-encumbered and are wondering how long they’ll have to wait before “the market comes back”, the answer is 5+ years, especially if you are more than 110% loan-to-value currently.   If the “bottom” is 1-2 years away at best, it’ll be another few years before values are high enough to get you out clean.  Any appreciation will be at a slow pace, because of the pent-up sellers who will jump in at every increase.  But if you stick it out, you won’t have to worry about moving!

For those who are still unsure, go out and try to rent a replacement home.  You will see that, even with good credit, the rental market is very competitive.  You’ll at least have a feel for what to expect for the next 2-7 years.

For more information, click on “Short Sales” at the top of this blog.