Short Sale Consequences

Are the credit consequences the same for a short sale vs. foreclosure?
If so, why would a seller want to participate in a short sale?

I know that there are the possibilities of the deficiency judgement and 1099 with the short sale, but wouldn’t they also apply with a foreclosure?

I want to be able to give a seller enough information to make an informed decision between the two.

There are two kinds of short sales… satisfaction and release. A satisfaction is where the lendor accpets the negotiated amount as payment in full, and reports the forgiveness on a 1099. A release is where the lendor reserves the option to pursue the debt at a later time while allowing the house to be sold.

You see releases where the lendor thinks that there is a chance of getting their money some other way. If your client is broke, the well is dry, then you will see a satisfaction.

Keep in mind if a 1099 is issued, the amount owed is limited to the marginal tax rate… which may well be zero.

Nothing derogatory appears on a credit report.

On the other hand a foreclosure… or a deed in lieu of foreclosure… is major credit hit. I have been told that you can’t even RENT for three years after a foreclosure.

Wheelema,

Thank you for your reply. What type of mark does the short sale leave on the sellers credit? I would think there would be something. Maybe not as bad as 7+ years. The tax consequence obviously would be minor compared to the effects of the foreclosure.

Are you saying that with the foreclosure there would not be a chance of defiency judgement or 1099?

Someone told me one incentive for the seller to do the short sale is that it gives them an opportunity to sell some personal property of the house to the buyer instead of losing everthing to the foreclosure.

If their credit doesn’t take the same kind of hit I would think that in itself would be their incentive.

Thanks