Short Sale Or Foreclosure: Which Is A Better Option?

By Author: Rich Griffiths
Total Articles: 6
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Many homeowners are unable to make their mortgage payments due to financial hardship. At such a time, they often have to decide between short sale foreclosure and foreclosure. A homeowner should take this is a decision after careful consideration of the advantages and disadvantages of both the options.

Foreclosure is a legal process that is initiated by the lender to terminate the owner's right to a property. The property is sold at an auction and the proceeds are used to pay the mortgage debt. Short sale, on the other hand, is selling the house for less than what is owed on the property.

A homeowner can go for short sale foreclosure after convincing the lender that this is the best option. However, convincing a lender for this is often hard. That is why it is recommended that homeowners should use short sale services of real estate agents.

When comparing both the options, most real estate experts are convinced that short sale is the better option of the two. They have compared both the options in terms of their effect on credit scores, loan availability, taxation and other factors.

Effect On ...
... Credit

There is no secret that foreclosure has a negative impact on one's credit. Many homeowners have suffered a loss of 200 to 400 points after foreclosure. Moreover, it stays on the record for 10 years and rebuilding your credit after foreclosure is very hard.

The effects of short sale foreclosure on credit scores depend on the seller. Most homeowners report a drop of 50 to 130 points in their FICO scores after a short sale foreclosure. However, the positive point about property short sale is that lenders report it differently. Some lenders will report it as "paid as agreed" and others might report it as "paid less than agreed." Some lenders might not even report it. Basically, your credit will not be that negatively affected by short sale as it will be by foreclosure.

Applying For A New Home Loan

As per the new Fannie Mae guidelines, a seller can immediately apply for a new home loan, if he or she had not been delinquent with his or her payments for more than 30 days and has not agreed to repay the debt. However, if the short sale foreclosure occurs because the seller was behind on payments for more than 30 days, then the seller would have to wait for atleast 24 months before becoming eligible for a new loan.

If the homeowner opts for foreclosure, then he or she will have to wait for atleast 5 years before becoming eligible for a new loan with restrictions. Also, a loan without restrictions will be available only after 7 years.

Getting A Loan

Applying for a car, student or any other loan is easier after short sale foreclosure. Loan applications do not enquire about a short sale. However, they do ask questions asking about foreclosure. Lying on a loan application is committing a mortgage fraud, which might attract severe penalties.

Overall short sale is a better option, because it puts the homeowner in control of the sale of the house. The lender is not in control of the sale. You would know who would be buying your home and you will not have to deal with the stigma of having foreclosure on your record.

It is also a better option for buyers, because they are able to buy a house at a reduced price. Short sale foreclosure is a better option for lenders, because atleast they are able to get some of their money back.

So basically it is a win-win situation for everyone involved. It is an option worth opting for.
Rich Griffiths is an experienced real estate investor specializing in short sales in Las Vegas, Nevada. Through his investment company he is able to help homeowners get out from under their over leveraged properties. Check out his Las Vegas Foreclosure & Short Sale Blog and learn how you can Avoid Las Vegas Foreclosure.