If you can't afford your mortgage payments but you owe more on the mortgage than your home is worth, you could let your lender take back the house through foreclosure or you could arrange a short sale. A short sale is one in which your lender lets you sell the house for less than you owe on it, encompassing a couple of key advantages over a foreclosure. Before deciding on either course of action, however, get professional legal advice.
It's Not About Your Credit Score
Although there are advantages to a short sale over a foreclosure, saving your credit rating is not one of them. Fair Isaac Corp., which developed the formula used to calculate credit scores, tells "The Wall Street Journal" that a foreclosure and a short sale have roughly the same effect on a score. And that effect comes on top of the damage already done by the string of late or missed mortgage payments and other unpaid bills that almost invariably precede a foreclosure or short sale.
Shorter Wait for a New Loan
If you hope to buy another home in the foreseeable future, then a short sale might be the better way to go. According to the real estate news service Inman News, conventional mortgage lenders won't even consider an application for a new loan for seven years after you've had a foreclosure. If you've had a short sale, by contrast, the typical waiting period is only two years. Note that this doesn't guarantee you'll get a loan -- just that you can apply.
A Different FHA Time Frame
The Federal Housing Administration, a government agency, helps people obtain mortgages with damaged credit by offering loan guarantees to private lenders. If you've had a short sale, you'll have to wait two years before you're eligible for an FHA-backed mortgage; that's better than the FHA's three-year wait if you've had a foreclosure. And if you weren't behind on your mortgage payments at the time of the short sale -- unlikely, but still possible -- there's no waiting period at all. Again, the ability to apply for an FHA-backed loan doesn't guarantee that you'll get one.
Deficiency Protection
One major advantage of a short sale over a foreclosure is bigger in some states than in others. When a lender forecloses on your house, it then sells the property, almost always for less than you owed on it. In some states, such as Florida, the law allows the lender to come after you for the difference, known as the "deficiency." Losing your home is bad enough; getting hit with a deficiency judgment after foreclosure just continues the nightmare. In a short sale, however, you have the opportunity to negotiate with your lender to waive the deficiency. You'll still lose your house and any money you've put into it, but the losses end there.
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