Short Sale or Foreclosure Requires Debate

If you are a homeowner who has fallen behind on your mortgage payments and are unable to bring the debt current, you have two choices for dealing with the situation. You can atempt to sell your home on a short sale or you can let the property fall into foreclosure. While both options will bring about the debt relief you need, both have long term consequences for your financial future. You should carefully weigh your options before deciding which will work best for you.

In a short sale, you sell the home for less than the balance due on your mortgage, but the sale can be complex and take several months to complete. You must first submit a proposal to your lender and wait for approval before you can list the home for short sale. The bank must also approve the sales deal, which can also take some time. While you will not receive any cash in a short sale, you may be alleviated of your remaining debt and remain in control of when you must give up possession of your home.

Allowing your home to fall into foreclosure does not entail the complications of a short sale. You simply stop making mortgage payments and wait until the bank notifies you that your loan is in default. At some point after that, the bank will put your home up for auction and either the bank or a third party will take ownership. The new owner will then set a date by which you must have vacated the home. You will lose any equity you have in the home and will have no say in when you must move out.

From a financial standpoint, both a short sale or a foreclosure will negatively affect your credit, although a short sale will not cause as much damage as a foreclosure. In both cases, the bank may choose to forgive any difference between the sale price of your home and the balance due on your mortgage, but they are also free to require you to pay that difference. Should the bank choose to forgive your debt, you could find yourself facing a large tax bill, as forgiven debt is considered taxable income. In a short sale, you may have the ability to negotiate with your lender as to how to deal with the balance due on your home loan, but if you lose your home to foreclosure, it is entirely up to your bank as to whether or not to forgive your remaining debt.

The prospect of losing your home is not an easy one to face. If you can, arranging with your lender to sell your home in a short sale gives you a greater ability to exercise some control over your situation. However, there may be times when it is best to simply allow the home to fall into foreclosure. It is best to discuss your options with a real estate professional that has worked with many other home owners with short sales and foreclosures to decide which choice is best for your situation.