Short sales have become a common solution for homeowners looking for an alternative to foreclosures. For many homeowners, they are a preferred way to help eliminate debt and get back on their feet. However, in some instances short sales can lead to more complications than benefits. It is important to consider both the advantages and disadvantages of short selling your home before making a final decision.
What is a Short Sale?
A short sale occurs when a homeowner -- with approval of his lender -- lists his property for sale for less than the balance of the mortgage. The proceeds go to paying off the rest of the mortgage. Whatever is not covered by the short sale is known as a deficiency. For example, if a homeowner owes $300,000 on a home and short sells it for $250,000, he will acquire a deficiency of $50,000.
Short Sale vs. Foreclosure
It is important to understand the differences between a short sale and a foreclosure. In a short sale, the homeowner still owns the property; in a foreclosure, the bank owns the home. Foreclosures often occur if a homeowner fails to short sell her home. Both short sales and foreclosures diminish credit scores, but short sales are generally easier to recover from.
Advantages of Short Selling
If a homeowner is struggling financially to cover his mortgage, a short sale is a good option to lessen debt. A short sale is preferable to a foreclosure in terms of a credit record and future home-buying options. In the case of a short sale, the homeowner may be able to obtain a home mortgage loan in as little as two years as opposed to seven for a foreclosure.
Disadvantages of Short Selling
After short selling a home, the borrower may still owe his lender a deficiency. Some states such as California have anti-deficiency laws to prohibit lenders from seeking a deficiency judgment following a short sale. However, if the borrower's state allows deficiency judgments, a lender can seek repayment of the amount owed after a short sale. Another disadvantage of short selling is damage to the borrower's credit score, although the damage is easier to recover from than it would be in a foreclosure. A borrower must also vacate as soon as a short sale closes and so must line up a place in which to move.
Making a Final Decision
Deciding whether to short sell requires significant time and thought. The choice will be affected by several different factors, such as how much the borrower still owes on the mortgage and whether his state allows deficiency judgments. If it does and the borrower will still owe a significant amount after a short sale, a foreclosure may be preferable only because it protects the borrower from liability for a deficiency.
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