Short Sale or Foreclosure in Yorba Linda or Orange County?
Many homeowners in Yorba Linda, Anaheim Hills, Placentia, or Orange County who can no longer afford to make their high mortgage payments find themselves with a question to answer: Short Sale or Foreclosure? In trying to decide between a short sale or foreclosure, there are a number of factors to consider. Recent legislation enacted in 2011 in California, makes a short sale preferable to a foreclosure in almost every circumstance. Let’s take a look at those various factors to help you further evaluate your own answer to the question “short sale or foreclosure”.
A. What is better for a Credit Rating, a Short Sale or Foreclosure?
In an Orange County Short Sale there are two separate but related events that will be reported to the credit bureaus. Those are the missed payments that lead up to the short sale as well as the payoff of the loan. This chart illustrates the different types of typical scenarios for each of these events, tells us which are possible for short sales or foreclosures, and which scenarios are better than others.
Scenario
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Short Sale
|
Foreclosure
|
Credit Effect
|
3 or less missed payments
|
Possible
|
Not Possible
|
Better
|
4 or more missed payments
|
Possible but avoidable
|
Necessary to facilitate foreclosure
|
Worse
|
Scenario
|
Short Sale
|
Foreclosure
|
Credit Effect
|
Typical Reporting on Credit
|
|
|
|
Paid in Full
|
Possible
|
Not Possible
|
Best
|
Paid in Full w/ "Settled for Less" Notation
|
Probable
|
Not Possible
|
Better
|
"Short Sale"
|
Not a Credit Reporting Term
|
Not a Credit Reporting Term
|
Not a Possibility
|
"Foreclosure"
|
Not Possible
|
Necessary Reporting
|
Worst
|
While each person’s credit score varies depending on a wide number of factors taking into account every item reported on a credit report, in general a credit score will drop by more points during a foreclosure, due to the “Foreclosure” reporting at the end. Additionally, a credit report that is heavily damaged by late mortgage payments as well as other late bills can be recovered from much quicker (usually with a 1-2 year(s) of good payment history) than a credit report that is branded by a Foreclosure. A Foreclosure will stay on a credit report for 7-10 years and will hold back efforts to try to increase a credit score in the future.
Short Sale or Foreclosure in Yorba Linda, Anaheim Hills, or Orange County? Advantage, Short Sale.
B. Which provides protection from the lender pursuing the balance of the loan through a Deficiency Judgment, a Short Sale or Foreclosure?
Through 2010 the answer to this question in California depended on a number of factors, such as whether or not the loan in question was the original loan used to purchase the house, whether the property was owner-occupied, if there were 2nd and 3rd loans, etc. However, in 2011California has enacted legislation that completely protect virtually all borrowers on short sales from both all lenders, not just 1st loans. This chart illustrates the differences in California.
California Short Sale or Judicial Foreclosure
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||
Homeowner (1 to 4 units) Generally Protected Against Deficiency
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||
Type of Loan
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After Short Sale
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After Judicial Foreclosure*
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First Trust Deed (1st loan)
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YES
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ONLY, if purchase-money and owner-occupied
|
Second Trust Deed (2nd or 3rd loan)
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YES
|
ONLY, if purchase-money and owner-occupied
|
Purchase Money Loan
|
YES
|
ONLY, if owner-occupied
|
Rate-and-Term Refinance (Refinanced loan)
|
YES
|
No
|
Cash-Out Refinance
|
YES
|
No
|
Owner-Occupied Home
|
YES
|
ONLY, if purchase money
|
Nonowner-Occupied Home
|
YES
|
No
|
Based on this chart, it is clear that in general in California a Short Sale provides more comprehensive protection than a foreclosure. Even in other states, such as Nevada where a lender can pursue a borrower for a deficiency judgment after a foreclosure, a short sale provides an opportunity for better protection. This is because while it is not legally mandated than a lender cannot pursue a deficiency judgment this can be negotiated (and often is) as one of the terms of the short sale. Of course, we always recommend that you consult with an attorney in regards to your particular set of circumstances, even in California.
Short Sale or Foreclosure in Yorba Linda, Anaheim Hills, or Orange County? Advantage, Short Sale.
C. What has better tax implications, a Short Sale or Foreclosure?
If you are facing a short sale or foreclosure, you may or may not have tax implications. Whether you do or do not have to pay taxes depends on factors such as if you live or have lived in the property, if the loan being dismissed is the original loan used to purchase the property, or if you pass the IRS’ insolvency calculation. Typically if you are on the hook for taxes under one scenario like foreclosure, you would be on the hook as well under the other scenario. That being said, if you are in a situation where you are not exempt for the tax on the mortgage forgiveness, you will almost always pay less tax by doing a short sale. This is because the amount of tax you pays depends on the amount of money that the bank loses either by accepting the short sale proceeds or by foreclosing and reselling the property. Almost always the bank will lose more money by foreclosing, which will create a higher tax for you.
Short Sale or Foreclosure in Yorba Linda, Anaheim Hills, or Orange County? Advantage, Short Sale.
D. Which allows a homeowner to remain in their property until it is sold and allows the owner to leave on their own terms, a Short Sale or Foreclosure?
Sometimes people try to figure out which process will allow them to stay in their home longer, a short sale or foreclosure. When a bank sets a foreclosure date and proceeds with the foreclosure, the homeowner will be required to vacate the property, even evicted by the sheriff if necessary. When a bank has a foreclosure date set, but has received a legitimate short sale request and package from the owner, the bank will typically postpone the foreclosure for however long they need to review and approve the short sale. The owner can then stay in the property until the short sale transaction closes, just like in an old-fashion standard home sale. Under this scenario, the homeowner also retains the dignified ability to move out of the house on his/her own terms.
Short Sale or Foreclosure in Yorba Linda, Anaheim Hills, or Orange County? Advantage, Short Sale.
If you live in Yorba Linda, Anaheim Hills, Placentia, or anywhere in Orange County, and want to discuss your options including Short Sale and Foreclosure please contact NoMortgageForeclosure.com via email or call us at 714-989-6176 for a free consultation. We always provide a completely confidential honest assessment of your situation.
If you live in Yorba Linda, Anaheim Hills, Placentia, or anywhere in Orange County, and want to discuss your options including Short Sale and Foreclosure please contact NoMortgageForeclosure.com via email or call us at 714-989-6176 for a free consultation. We always provide a completely confidential honest assessment of your situation.