One of the more common questions I revolves around the potential benefits of short sales. As a general rule, people often think they are a greater benefit than, in reality they truly are. A short sale is a sale of property where the proceeds are less than the balance owed on the property’s loan. It often occurs when a borrower can’t pay the mortgage loan or falls behind on their property but the lender determines that selling the property at a moderate loss is better than pushing the borrower into a potential foreclosure. This can benefit both parties and avoids foreclosure. This agreement, however, does not necessarily release the borrower from the obligation to pay the remaining balance of the loan.

One of the most common enticements to borrowers is that a short sale avoids a foreclosure. While this is technically true, the credit implications are essentially the same…first it remain on your bureaus for 7-10 years (the same as bankruptcy) and because whether you have a foreclosure on your credit bureau or a short sale, you will still need to wait (generally speaking) 2.5 to 3.0 years to qualify for a mortgage. In addition, they are lengthy, complicated and often fall apart because all parties cannot come to agreement. Even worse, from the debtor’s point of view sometimes shorts sales still result in collectable deficiencies that can be pursued in court. In short, the benefits are overstated and if you hear someone espousing the benefits of shorts sales they generally are a broker or involved in real estate transactions in some way.

If you are considering a short sale BECAUSE you are enticed by avoiding a foreclosure, STOP! And Ask this question: In addition to your mortgage debt, do you have debt levels of significance on top of it? If the answer is yes, as is usually the case, the benefits of a short sale, if they ever truly existed, almost certainly evaporate. And, if the answer is yes, bankruptcy is often a smarter option because; (1) it also deals with and discharges other debt and creditors, (2) it ensures there is no deficiency on the mortgage, (3) does not result in a huge amount or any additional damage to credit than a short sale itself. (4) Bankruptcy can also enable the debtor to stay in the house longer by taking advantage of the lengthy
foreclosure process. And one final point, often times those who do short sales later, to their dismay, a bankruptcy is required later anyway…and this only serves to delay credit rehabilitation needlessly.