Foreclosure or Short Sale?

As a Professional real estate agent I am asked many questions as I am out meeting people.  Lately one of the most common questions that I am asked is “Which is better for me Foreclosure or a Short Sale?”

Generally speaking a Short Sale is slightly better than a Fore Closure, or even a deed-in-lieu of foreclosure.  It should be noted that all three options Foreclosure, Short Sale or Deed-in-Lieu of foreclosure have a derogatory affect on your credit score ( FICO ).

Foreclosures and Short Sales all require seasoning.  Meaning that a certain amount of time must elapse before you will be able to purchase a home, with a bank loan.  The seasoning of a foreclosure is 5 years and that of a short sale is only 2 years.

Once a property is foreclosed on, that fact is kept in public records for a period of 10 years, this is known as a “derogatory public record” which is one of the three categories that can greatly lower your score. The other two are Serious Deliquencies and Collections filed.
Many home owners who are facing foreclosure, are either seriously behind in their mortgage payment or anticipate that they will soon be unable to pay as required.  This alone will also affect your credit report.

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When applying for credit anyone who has been foreclosed on must attest to that fact by answering the following two questions:

• Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years? (Y/N)
• Have you directly or indirectly been obligated on any loan which resulted in foreclosure, transfer of title in lieu of foreclosure, or judgment? (Y/N)

It is likely that after a short sale, foreclosure or deed-in-lieu of foreclosure that the home owner will receive from the bank a 1099C.  This is because most home loans are loans without recourse meaning that if the home owner defaults on the loan, the bank an only take possession of the property.  In short – no pun intended, someone has to pay the taxes on the money.

The money that the bank has forgiven the home owner is considered “earned income” and therefore it is reported using form 1099-C, otherwise referred to as Cancellation of Debt.  A short sale may provided the home owner with a smaller tax liability than a foreclosure.

The IRS has this to say about foreclosure:
“The IRS urges struggling homeowners to consider their options carefully before giving up their homes through foreclosure.”

Sean Schroeder, REALTOR
The Real Estate-XChange
cell: 757-839-3954
ofc:  757-277-9779
Equal Housing Opportunity ( EHO )

The Real Estate-Xchange
517 Baylor Ct.
Chesapeake, Va. 23320