What's Worse: Foreclosure or Short Sale?

If you are one of the many Metro Detroit homeowners who have fallen behind on their mortgage payments, you are probably wondering what is worse "Foreclosure or Short Sale".

A short sale is when the lender agrees to accept a mortgage payoff amount less than what is owed in order to facilitate a sale of the home. The lender forgives the remaining balance of the loan.

What is in it for the Seller?
The ideal scenario would be for the seller to catch up on their payments and stay in their home. But for an increasing number of Metro Detroit homeowners, this is not a realistic possibility. This is why we look at Short Sales....to resolve the problem rather than hide from your lender and hope the issue will go away on its own or worse being put out of your home on the lenders time table rather than your own.

As a seller, there are cons to a short sale. Such as you will lose your home--but that will happen anyway with a foreclosure. There are pros as well, such as your credit score will recover faster than with a foreclosure; you will be eligible for a new mortgage in two (2) years rather than four (4) with foreclosure; eliminates the risk of employment issues because you may lose or not be eligible for the issuance of a security clearance. This is particularly important for persons in the military or government jobs, police officers etc.

In foreclosure, the lender has the right to file a deficiency judgment against the borrower for any shortfall, but with a Short Sale the lender may agree to waive this right. In some cases, a lender may send you a 1099 tax form, which will list the "shortfall" as income to the seller. The Mortgage Forgiveness Debt Relief Act of 2007 gives Short Sellers a tax break by removing the tax liability for your primary residence. This does not pertain to investment properties.


What Motivates the Lender?
Why would a lender let you walk away from the home and forgive the shortfall on your loan? To save time and money. The foreclosure process is a long and expensive process. Once the lender realizes a foreclosure is eminent, a Short Sale may seem like the lesser of 2 evils. Also, with a short sale the property was never listed as a foreclosure, therefore improves the lenders foreclosure rate.

Short Sale Killers
An attempt to short sale your may fail if:

• No Default on the Loan: Lenders almost never accept a short sale offer if the borrower is not behind on their mortgage payments or no true hardship exists. Just wanting to walk away because there are better deals out there is not going to get you an accepted Short Sale offer.
• Bankruptcy: If the seller has filed for bankruptcy don't even attempt a short sale. Lenders will not consider a short sale offer when the seller has filed for bankruptcy because negotiating a short sale is considered a collection activity and collection activities are prohibited during the bankruptcy process.

Negotiating a short sale is not for the faint of heart. It can be very time consuming and take months to negotiate from start to finish. A well put together short sale package along with an experienced Realtor will net the best results with dealing with the lender.

Short Sales - A Buyer's Market. Get On The Band Wagon

Here in metro Detroit it seems everyone is looking to either sell or buy with the assistance of a Short Sale. This is a great avenue for seller's who are facing foreclosure or are upside down on their mortgage. It is just as beneficial to the buyer who is looking for a great deal.

A short sale means the seller's lender is accepting a discounted payoff to release an existing mortgage. Just because a property is listed with short sale terms does not mean the lender will accept your offer, even if the seller accepts it. One huge benefit for both buyer and seller is the lender pays ALL fees and commissions

Buyers' markets exist when there are a lot of homes on the market and very few buyers. If inventory--the number of homes on the market in your neighborhood--have been rising, it's likely that the days on market have been increasing. Couple that with declining sales figures over previous months, and home buyers are in an enviable position to negotiate. When purchasing a home that is listed as a Short Sale, the savings on the purchase price could be immense. Less money = more house.

The negotiation process with the lender is delicate dance that you will need an experienced Short Sale Specialist to perform. Negotiations can be long and arduous, taking in some situations months to accomplish an acceptance of an offer. If you are thinking of purchasing a home that is listed as a Short Sale, be aware this could be a long process but the payoff in the end could be a great house at a huge discount.