Short sales and foreclosures are generally regarded as two different options for struggling homeowners. But they are also similar in the sense that they always have a negative impact on the borrower; it’s more a question of what’s less damaging. Whether you choose a short sale or let the bank foreclose, there are consequences you need to take into account—your finances, your credit, your chances of finding another home. This guide offers a look at some of the most common short sale and foreclosure consequences and how you can deal with them.
Credit scores
Most borrowers are probably more concerned about post-short sale or foreclosure credit than anything else. After all, credit is crucial to pretty much any transaction these days. The fact is that your credit will certainly suffer whether it’s a Short Sale and Foreclosure—it’s mostly a matter of minimizing the damage. With a short sale, you stand to lose anywhere from 100 to 300 points, depending on how far behind you were at the time. A foreclosure can slash up to 400 points off your score. So if you want to maintain a decent score, a short sale is definitely the better choice.
Tax consequences
You may figure there’s not much left to lose when you’ve sold off your home, but many borrowers are surprised at the short sale and foreclosure tax implications. Technically, since the lender forgives part of your balance in a foreclosure or Short Sale, the difference can be considered capital income and is therefore subject to tax. There are laws that keep short sale and foreclosure sellers from being taxed, such as the Mortgage Debt Relief Act of 2007, but each state has its own rules and exceptions—and it’s up to you to know where you fit in.
Future mortgages
Chances are you’re considering buying a new home after selling off your old one. But short sale and foreclosure rules set different wait times before you can take out a new mortgage. A short sale usually entails a two-year wait, while a foreclosure can take five years or more. An exception is when you do a short sale but were not more than 60 days behind on your mortgage—it’s rare, but if this is the case, the wait time does not apply. Experts recommend, however, that borrowers wait until their credit has recovered enough to get rates they can more comfortably afford.
