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Is a short sale a better alternative than foreclosure?

Homeowners threatened with foreclosure sometimes try to arrange a short sale with a buyer to avoid having their homes being foreclosed upon.

There are advantages to a short sale versus foreclosure, although neither is optimum. Short sales eliminate many costs and fees normally paid by both the debtor and the creditor, and the debtor's credit rating doesn't take as hard a ding.

Short sales allow a homeowner to get out from under an upside-down property where more is owed than its market value. Mortgages don't have to be in arrears for short sales to be arranged, but most occur when it becomes impossible to keep up with the mortgage payments. In order to proceed, however, the homeowner must obtain permission from his or her lender.

Lenders are under no obligation to do this, as it means they will be accepting less than the balance on the property's mortgage, leaving a deficiency. Homeowners need to be very careful when entering into short sales, because they can wind up still on the hook for the difference between the short sale amount and the mortgage. It's a good idea to have your attorney review any documents in a foreclosure or short sale to make sure that you understand the terms clearly.

Sometimes, not even a short sale will be enough to get you out of the financial quagmire you've fallen in. Filing for Chapter 7 or Chapter 13 bankruptcy can sometimes stop the foreclosure process on your home in its tracks, giving you time to reorganize your debt, get credit counseling and emerge in a better financial position.

Source: Diffen.com, "Foreclosure vs. Short Sale," accessed Sep. 16, 2016

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