When you are presented with the choice of selling your house as a short sale, or surrendering it to the bank as a foreclosure what should you do? Next are some factors to consider before giving up your house to the foreclosure process:

• in a short sale you are in control of your house, this includes the price at which is sold and to whom it is sold.
• being foreclosed can make you feel stigmatized since it is considered incorrect by most of our society.
• when making a short sale your house will be sold as any other house in the market, with no negative connotation.

If you go and sell your house in a short-sale and your payments have been current all along Fannie-Mae guidelines allow you to purchase a home right after, even though finding a lender that is willing to do this can be really hard. You can also qualify for an FHA loan, but these usually take over 3 years. If you have not been current in your payments you might still qualify to buy another home with Fannie-Mae backed mortage, after only two years. When a foreclosure happens the waits becomes longer.  with certain restrictions you might be able to buy a home after a 5 year wait, with no restrictions the wait is usually 7 years.

Credit is another factor to consider. Even though your credit report won’t describe the sale as a “short-sale” it can say something like ” paid in full for less than agreed”, and the usual FICO credit point drop ranges from 50 to 130 points. When a foreclosure takes place the negative FICO point score usually ranges from a 200 to 400 point drop. Remember that credit scores stay on your public record for around 7 to 10 years.

In California a deficiency judgment won’t be filed if the house was sold as a short-sale, it was your personal residence, and was financed through purchase money.  A bank will negotiate a deficiency judgment with you on a  short-sale, but never after a foreclosure. A deficiency judgment may be filed regarding a hard-money loan if the lender forecloses with a judicial foreclosure versus a trustee sale.

Loan applications also go much easier on short-sales, when they don’t ask you any questions regarding your sale, contrary as to when you have a foreclosure on your record, which will be a mandatory question from the bank. The loan most likely will be denied if the answer is “yes”.

When a foreclosure is filed you can petition for a short-sale and stay in your property for2-3 months or longer, while the bank considers your request. After a foreclosure,  the bank can ask you to move out immediately unless previous arrangements have been made.

As for taxation, thanks to the mortgage debt relief all personal residences are excluded from federal taxation until the end of 2012 for short sales.  Some states will still tax you unless you qualify for exemptions.  Only investors are not exempt under the mortgage debt relief. It is the same case for foreclosures only that some lenders will mail a 1099 form, even if the owner is exempt from it.

A Deficency judgment is an overall complicated processes to understand , so when you are asked if  a bank can file one after a foreclosure or short sale what is the correct answer? Most of the time deficiency judgments come as a surprise after a short-sale or foreclosure because the seller didn’t obtain the necessary legal or tax advice beforehand.

Contrary to popular belief deficiency judgments arise from the defaulting on a promissory note, not the mortage. A promissory note is nothing more than a promise to pay back to the lender, and in some state the law can hold you personally liable for these and come after your assets if you miss your payments. For a promissory note to work it is usually secured by a mortage or a trusted deed which is usually recoreded in public records so the public knows when a property has a  lien against it.

When a promissory note isn’t paid the beneficiary has the choice to foreclose the property since this is the security for the promissory note. If the payments aren’t made by the borrower during the foreclosure period, the home can go to auction. Generally properties in auctions are sold for less than the amount owed, where is when the deficiency arises from. If it was sold for more than the amoun owed there is no deficiency. When no one bids enough to pay the bank, the bank keeps the property.

To stop losing money sometimes bank will do a short sale accepting less than the amount owed. This is done when the foreclosure is pending. If a real state agent is hired by the seller, an offer is made by a buyer, and the bank accepts it, the home is sold at a loss to the bank.

A deficiency is the difference between the amount received by the buyer and the fair market value of the property, as long as the amount received is less than the amount owed. Whether a deficiency judgment can be pursuid by a bank depends if the promissory note makes the seller personally liable for the debt, which greatly depends in the state you live.

In California all purchased-money loans on a one-to-four-unit residential dwelling are not tied up to deficiency judgments. Hard money-loans, or loans made after the home was purchased through refinicing or second mortage, can be subject to deficiency loans under a number of different conditions.

Sometime hard-money lenders sell the promissory note to collector for much less than what its worth, which then the collector will try to get from the borrower. When a lenders accepts a leesser amount  through a short-sale or foreclosure the security for the hard-money is realeased but the promissory note may not be, and you will probably get a call later asking for repayment. Next, a  couple of points to remember if this ever happens to you.

• Most of the times lenders will negotiated for a discount payoff, or settled for less than the full amount.
• If you are asked fo a new promissory note to replace the old one make sure you get a “paid in full” promissory note.
• If note is sold to a collector or investor the discount is usually greater.
• After the note is fully paid, ask the lender for a promissory note marked ” paid in full.”

As a buyer or seller, always consult witha  real estate agent, lawyer or accountatnt before getting into a shot-sale or foreclosure. In actuallity you have better chances of paying of your debt with a short-sale than with a foreclosure.

Real Estate