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Most
mortgage experts agree that sellers will take a bigger hit on their
credit score by going through foreclosure versus a short sale. A short
sale will show up as a pre-foreclosure in redemption status on your
credit report, resulting in a loss of approximately 100 points on the
FICO score compared to a 250 - 400 point loss with a
foreclosure.
Advantages
Of A Short Sale
If you're a seller trying to decide whether to let your home be
foreclosed on or attempting a short sale, salvaging your credit is the
main advantage to doing a short sale. In many cases you can apply for
a mortgage within a year or two of finalizing a short sale. You will be eligible, under Fannie Mae guidelines, to buy another home in 2 years
but if your credit report does not reflect a 60-day+ late pay, under Fannie Mae guidelines, you will be eligible to buy another home immediately.
All lenders report short sales differently and some do not report them to the credit bureaus at all.
Loan applications currently don't ask questions about a short sale. You may report that you sold your home.
The IRS has made a personal residence exempt from mortgage debt relief until the end of 2012 for federal
taxes, therefore you owe no taxes on the difference between the loan
amount and the sale price as long as the money from the mortgage went
into the home - either through the purchase price, for updating or
adding on to the home. However, if you refinanced and used the money
to take vacations, buy a boat, etc. you may be taxed on that money.
Consult a tax adviser for further information and your liability.
Disadvantages
Of A Foreclosure
A foreclosure, however, can stay on your credit report for up to 10
years, making it difficult to purchase another home or a car. Under Fannie Mae guidelines, without extenuating circumstances, you will not be eligible to buy another home for 7 years.
In some instances, it may affect certain employment prospects.
Most loan applications
request information about a past foreclosure. You are likely to see the
following question on an application: "Have you ever had a property foreclosed upon or given a deed-in-lieu thereof in the past 7 years."
You don't want to lie because you could be charged with load fraud if
caught.
Always
seek legal and tax advice before making any decision regarding a short
sale. Always consult an experienced Realtor when thinking of buying or
selling a short sale property.
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