Foreclosure vs. short sale: pros and cons
With today’s reduced property values and increased unemployment, it’s tempting for some homeowners to just throw their hands up in defeat, allow the bank to take their home in foreclosure and rid themselves of the monthly mortgage burden.
Even suffering through the paperwork and stress of a short sale may seem too much for an overwhelmed borrower to handle.
But Florida homeowners should be aware of unique rules in the state that make the benefits of a short sale typically outweigh the ease of walking away in a foreclosure.
The biggest difference between Florida and many other states when it comes to losing a home is the deficiency judgment.
While some states ban lenders from collecting the remainder owed on a loan after a foreclosure or short sale is completed, Florida law allows banks to go after borrowers for up to 20 years. That can lead to a garnishment of wages long after the home is gone.
In a short sale, where the bank agrees to take a lesser amount for the home than what is owed on a loan, lenders sometimes are willing to write off the deficiency on the front end.
In a majority of the cases I’ve handled, the bank has waived its right to seek a deficiency. However, we are seeing this year that the lenders are more reluctant to do so.
That was the case with Kissimmee resident Scott & Teresa, who in 2010 found themselves in a home the couldn’t afford.
Following a loss of employment, and with two children, Scott & Teresa bought a $235,000 home that they lived in comfortably for a 4 years. But then one of them lost their job.
Teresa remembers the day the bank served the notice of foreclosure.
“I cried my eyes out,” Teresa said. “That’s when I panicked because I really didn’t want it to happen.”
Scott & Teresa got advice from Jerry LaRose on doing a short sale.
Their bank, CitiMortgage, waived its right to seek a deficiency even though it ended up taking $150,000 less than what was owed on the loan.
Also, if a bank refuses to waive the deficiency in a short sale, it still would have to go back to court to seek a judgment.
In a foreclosure, at the end of the proceeding, a deficiency judgment is automatically awarded by the courts and the bank is free to seek a claim.
“In the past, people just wanted to move from the property and get on with their lives and didn’t understand what the lenders’ rights were in terms of pursuing a deficiency claim, I think people are more aware now about what can happen after the fact and that their nightmare can continue.”
Another consideration is the effect of a foreclosure or short sale on credit.
According to the Fair Isaac Corp., which developed the widely used measurement of credit risk called a FICO score, the negative effect of a foreclosure is marginally worse than a short sale.
But in Florida, a deficiency judgment from a foreclosure is likely to have a much larger impact that will prohibit your ability to buy another home for many years. Currently, Fannie Mae states that you may purchase another home after only years after completing a short sale. Whereas a Foreclosure they say you would have to wait 5 Years.
There are a few situations where some experts believe it is better for someone to go to foreclosure rather than do a short sale. I always suggest to consult an attorney at that point.
To do a short sale, a borrower must give all of his or her financial information to the bank before it will decide whether to allow the short sale. The idea is that if a person can afford to pay the mortgage, the short sale may be denied.
“Now the lender knows everything about your finances and they can better decide whether they will go after you or not.
If a lender doesn’t know your finances, it reduces the chances it will go after you following a foreclosure.
You might fly under the radar, With the millions of people going through this, they are probably going to go after the low-hanging fruit.
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Jerry LaRose is an Orlando Area Residential Real Estate Expert, who can assist you with the purchase and/or sale of Real Estate in Orlando, Windermere, Winter Garden, Kissimmee, St. Cloud, East Orlando, Longwood, Altamonte Springs, Maitland, Winter Park, Oviedo, Apopka, Lake Mary, Clermont, Ocoee Florida or any place in the country. Jerry has created a team of professionals throughout Orlando and the country to ensure that you enjoy a smooth transition to your new area. Please visit http://OrlandoShortSaleExpert.com or www.JerrySellsOrlando.com for your real estate needs. Please give me a call if you have questions about the Orlando and Central Florida real estate market.
P.S. If you are listing your home as a short sale in Orange, Seminole, Polk, Lake or Osceola County Florida and Orlando, East Orlando, St. Cloud, Davenport, Clermont, Longwood, Windermere, Winter Garden, Kissimmee, Winter Park, Altamonte Springs, Maitland, Apopka, Lake Mary, Oviedo or Ocoee Florida make sure you hire an agent who knows how to do short sales and has the experience to get the job done. We are doing successful short sale packages. Call us at 407-580-7011 to find out more about Orange County Short Sales and Orlando Area Short Sales.
