Should You Walk Away Or Try A Short Sale? Short Sale Versus Foreclosure

In today’s real estate climate, many people with underwater mortgages are thinking of walking away from their debt, otherwise known as strategic default. Others may be considering a short sale of their home. Which is better, really? Will a short sale really wreak less havoc on your credit score? What about the waiting period for buying another home? Here are some issues to think about regarding short sale versus foreclosure.

Strategic default benefits

Although voluntary foreclosure may seem to be the worse choice of the two, there may be some apparent benefits:

  • Foreclosure proceedings may take months to finish.
  • You will have no mortgage payments to make during this time.
  • You still own the home until the foreclosure is final.
  • You won’t have potential buyers coming to see the home at all hours.
  • Banks sometimes give cash for keys after the public auction.

Strategic default drawbacks

  • You return to being a renter.
  • Your credit score can drop 200 to 300 points and the foreclosure will remain on your credit report for 10 years. Poor credit can affect everything from your ability to rent an apartment or house to getting a job in some fields.
  • You may not be eligible to buy another home for 7 years, according to Fannie Mae guidelines, unless you can prove extenuating circumstances.
  • Find out the tax implications of walking away from your house. You may have to pay income taxes on the value of your home.

Short sale benefits

  • You will not have to go through the stigma of foreclosure.
  • You may be eligible to buy another home in 2 years instead of 5-7, under Fannie Mae guidelines.
  • You may be eligible to buy another home immediately if your credit report does not show more than a 60 day late payment.

Short sale drawbacks

  • A short sale is a long process and waiting for your lender to respond can be frustrating.
  • You must disclose personal records to the bank such as tax returns, assets, debts, bank accounts and a hardship letter explaining your situation.
  • You must find a buyer and put up with showing your house, possibly for months.
  • Your lender can turn down your short sale request.
  • Although your credit score could drop up to 200 to 300 points in a short sale, if you stay current on your mortgage payments while going through the short sale it should drop much less, perhaps only 100 points. Although a short sale will remain on your credit report for up to 7 years, you can start rebuilding your credit right away.

Whichever route you take, make sure you check out all the implications by getting legal and tax advice before you make the decision.