Which remedy is best?
The correct answer is that "it depends." It depends upon the facts of each case. When an analysis is performed, usually one of these remedies will be a better "fit" than the other. The two are very different. Which is best depends upon a homeowner's goals and needs. Here, in general terms, are some of the differences.
- Purchasing a new home. Under current guidelines, a homeowner who loses a home to foreclosure may be ineligible to obtain a new mortgage for up to 5-7 years. In the case of a short sale, the period of ineligibility is two years, significantly less. Contrary to popular opinion, it is not always necessary to default on a loan to successfully negotiate a short sale. If it is possible to keep the loan payments current while negotiating a short sale, a homeowner has an excellent chance of being immediately eligible to purchase a new home and obtain financing.
- Credit Score. All other circumstances being equal, a foreclosure can impact a homeowners credit score by 250 to 300 points. Recovery can take 3 years assuming no other financial problems develop. In the case of a short sale, and assuming all other payments are kept current, the damage may be as little as 50 points with recovery in as little as 18 months.
- Credit History. A foreclosure will remain on a credit report for up to 10 years. A short sale is not reported on a credit history. Typically the loan is reported "paid in full, settled".
- Employment. A foreclosure can be prejudicial to current and future employment. Security Clearances can be jeopardized. A short sale is not reported on a credit history and is not a challenge to employment or most security clearances.
- Deficiency liability. Arizona has anti-deficiency statutes that were designed to protect a homeowner who loses a home to foreclosure. It is unclear whether these statutes furnish any protection in a short sale situation as, in such a case, there is no foreclosure. In a short sale, a homeowner's first and best line of defense is to negotiate a favorable short sale agreement with the lender(s). Because of this, in some cases, a foreclosure may provide more certain and better protection from deficiency liability.
- Effort Required. For some Clients, the remedy most simply obtainable is best. The easiest remedy is unquestionably a foreclosure which requires no action by a homeowner other than the cessation of monthly payments. A short sale is a sophisticated real estate transaction and requires considerable effort to successfully complete. As with any business transaction, it is possible that it can go wrong and this can lead to unanticipated liability. To minimize risk, it is strongly recommended that all short sale agreements and contracts, beginning with the real estate listing agreement, be reviewed by your real estate attorney to make sure they are designed to work correctly and protect your interests in a short sale environment.
So in each case a balance must be struck. Which goal is most important? How much risk can a homeowner tolerate? Only a complete analysis of all circumstances and a frank discussion with your real estate attorney will yield the correct answer. Whichever remedy is selected, it is strongly recommended that homeowners liability insurance and all applicable HOA dues be kept current so long as the home is still owned by the homeowner.