Question: Help me understand the difference between a short sale vs foreclosure. I bought a condo in Tampa, Florida in September 2005. This was my first real estate purchase and my primary residence until I transferred to Maryland for my job in July 2008. I have a first mortgage for $150k and a HELOC for $25k. The property has been short sale approved and there is a buyer that is going to purchase it for the listed price of $60k. We are ready to close but I need to pay all the delinquent HOA fees, late fees and attorney fees that have mounted up. I can not afford to pay the $3000 in late HOA fees to close on the short sale. Now, I am facing foreclosure. I have asked the HOA to waive the late fees and attorney fees so I can do a short sale but they are refusing. Is it worth it to borrow the money from friends and family so I can do a short sale, or should I just let the condo go into foreclosure?
Answer: -This is a common question that gets asked a lot about the difference between a short sale vs foreclosure. While both are damaging to your credit, a short sale is a much better option – and here’s why…
#1 – a short sale on your credit can be fixed within 2 years or less with proper credit repair guidance and you can get back to normal life again. A foreclosure on the other hand, can stay on your credit for 7 or more years. It’s much more difficult to get removed. With lower credit scores not only do you have less borrowing power, a lot of insurance rates and other things are based on your credit. So you might have higher premiums for a longer amount of time.
#2 – with a short sale, you can eliminate the possibility of a deficiency judgment with the 2nd mortgage if it’s done the right way. The lender has 2 options. Either to “release the lien” and go after the borrower or full mortgage satisfaction where they “give up” that right. A short sale can fully satisfy the mortgage so they can’t come after you for deficiency. With a foreclosure they can and may.
While these might be some great options, you might have heard that you will be 1099?d for the amount that was settled and you’d have to pay taxes on that amount. Yes this is true, however, for most people who are in situations like this, all they have to do is contact their tax accountant and claim insolvency. Besides, if they file a 1099 for the short sale, you can bet they are going to file a 1099 if the property went to auction and they had to sell it for less than what is owed.
Hoped this has helped you understand the difference of a short sale vs foreclosure. Good Luck.
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