A home used to be one of the best and safest investments you could make. Unlike cars, boats, or other big-ticket items, a home would appreciate in value. A car loses a lot of its value as soon as you drive it off the lot, but a home would gradually build in value as parks in the area were built and other neighborhoods were built up around it. This practically guaranteed that after only five or ten years you’d be able to sell the home for more than you paid for it.
However, the recent housing bubble – and subsequent downturn in the economy – has changed all that. Not only are homes losing value and dropping below the threshold of what people bought them for, but many people have lost their jobs – making it difficult for them to even make mortgage payments.
For those people who are able to get by each month, their best bet is likely to just keep making payments and hope the real estate market improves. For others – like the un- or under-employed – that simply isn’t an option. They are “underwater” on their mortgage (meaning the loan is more than the house is worth) and may even be missing a few payments.
While one option for them is foreclosure, others instead opt for a short sale. In a short sale (and this is a bit oversimplified) the bank agrees to forgive a portion of the debt, usually the difference between what the loan is for and what the home ends up selling for. They can use this difference as a tax write-off, and they can avoid the lengthy and arduous foreclosure process. However, it’s up to the lender to decide whether or not they’re going to do a short sale, and whether or not they’ll accept an offer on the home. If they don’t want to do a short sale or don’t find a suitable offer, they don’t have to sell.
When it comes to your credit score, the actual short sale does as much damage as a foreclosure. They’re both considered serious issues and will ding your score accordingly. However, overall the process of a short sale will be better for your credit score. This is because if you know you’re going to foreclose, you’re going to stop making payments; you know you’re going to lose your house so there’s no point in paying anything on it. But with a short sale, you may still be making payments month to month and, therefore, not see as much damage to your credit score.
All of this being said, laws and practices differ from state to state; be sure you check with a local attorney to get pertinent details for your own state.
Scott Spjut is a writer and editor who has been featured in many online and offline publications, including Newsweek, the Washington Post, CBS News and SearchEnginePeople.com. With a B.A. in Communications, He currently writes for PMI Education, helping people accomplish their goals.