Actually, compared to a Foreclosure, there are no Disadvantages to a Short Sale, just a few hurdles. First of all, let me briefly define a Short Sale. Simply put, a Short Sale (sometimes called a Short Pay), is a situation in which a home is sold to a new buyer, and the sales price is less then the face value of the mortgage loan(s), plus back payments (if any), plus all other sales and closing costs such as Title, Escrow and real estate commission fee's.
As we discussed in a previous blog post, many banks today would prefer to accept a Short Sale versus going through with a Foreclosure repossession of the property. But what are the Advantages of a Short Sale as compared to a Foreclosure, from the Orange County homeowners point of view ?
The main advantage of a Short Sale is it is less damaging to ones credit. First of all, many credit counselors state that a Short Sale will stay on ones credit report for about 4 years, while a Foreclosure will stay on the credit report for up to 7 years. And, an experienced credit counselor may be able to have the Short Sale removed from ones credit report in less time then that. Another factor, is that some lenders and credit consolers claim that a Foreclosure will damage ones credit by as much as 200 points more then a Short Sale. If one intends to borrow money in the next 7 years for a car, boat, or another home, this can make a huge difference in ones ability to get another loan and what the interest rate will be.
The other advantage of a Short Sale is the sense of dignity and responsibility. During a Short Sale, the homeowner is marketing the home for sale with a local Realtor (who hopefully has vast experience with Short Sales), in an attempt to sell the home at the best price thus bringing in as much money as possible to the Bank. When the home is sold to a new home buyer, the homeowner moves out a that close of escrow in a orderly and dignified manner, just like any other home sale transaction. This is a relatively painless resolution to a difficult situation. On the other hand, after the Foreclosure sale, you are forced out of the house by court eviction. Then the home usually sits vacant as the grass turns brown, and newspapers collect in the driveway. Then in about 4 to 6 months, a local Realtor is hired by the foreclosing bank and 'Foreclosure for Sale' signs are posted on the property. A humiliating ending to a painful process.
What are the hurdles or disadvantages of conducting a Short Sale, as compared to a Foreclosure? One, the home owner must be essentially broke... that is to say, the property owner must prove to the bank that they are ill-liquid and essentially unable to make your mortgage payments. If one has a good source of income and/or significant sums of money in the bank, the mortgage lender will most likely decline the Short Sale request and demand that the homeowner make up for the Short Pay with their own cash. Or may require the home owner to carrying a new note to be paid back to the bank with the homeowners strong income.
The other hurdle, is that the home owner may be liable for federal income tax based upon the income generated by the debt relieve. This does not always happen, and congress is now considering a bill to remove this penalty from the Tax code. Actually, compared to a Foreclosure, this is not a disadvantage, for this same potential Tax consequence can happen as a result from a Foreclosure as well.
If you are a home owner and you find yourself behind in your payments and your value of your home has dropped, please give us a call. Our team of experts will advise you as to the best approach to resolve the situation and the conversations will be held in the strictest confidence. You can reach us at: 949-388-3396, or email us at: Info@OCRealtyGroup.com
