If we compare a short sale vs. foreclosure, we will find a few differences between the two in terms of affecting the borrower. For the purpose of this article, let’s ignore differences in the process and look only at how it will affect you.
- Credit Score – Short sales do not generally show up under public records and if the short sale is completed successfully, then credit will only show the late payments to the mortgage and the statement “settled for less than full amount due.” Depending on the rest of the credit, the score may only be affected by as little as 50 to 60 points. Foreclosures are public records somewhat like bankruptcy and lower the credit score by almost 175 to 300 points.
- Credit History – Once the ‘short sale’ is closed and the deal is done, the record is generally closed. But foreclosure will remain as a public record on your credit history for 7 to 10 years. Consider that many employers pull your credit as a means to find ways to weed out competition for a position.
- Future Property Purchase – If an individual completes a short sale he/she will be able to purchase a property after 2 years (time period may vary depending on the credit score). Individuals losing a home to foreclosure will not be eligible for purchasing any property for the next 5 to 7 years.
- Taxes – In both cases at the end of the year the lender will provide a 1099-A (foreclosure) or 1099- C (short sale) which reflects the amount they have written off. This will show as income to the homeowner who may or may not be responsible for paying taxes on this income. Insolvency may be an option for this.
- Employment – There is no effect of ‘short sale’ on current or future employment of the seller. But foreclosure may create a problem (even termination) in current as well as future employment due to it being a matter of public record.
- Security Clearances – Mostly, short sales do not challenge any security clearances. But foreclosure can be a problem for a security clearance. See this article at armytimes.com for more.
As you can see, it pretty much benefits you in every way to pursue a short sale when the only alternative is foreclosure.
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