Both a short sale and a foreclosure may result in a deficiency balance owed to the lender. However, if you have just one loan on your residence, many lenders will forgive the remaining balance and report the debt as settled to the credit agencies after a short sale closing. (Note: pursuant to legislation passed in 2008, the forgiven balance no longer has to be reported as income in most cases so long as the home was used as your primary residence).

If you have two loans securing your property, the second lien holder may release the lien for purposes of the short sale; however, they rarely agree to release the debtor’s personal liability for the remaining deficiency.

The impact on your credit score after a short sale is nearly identical to the impact you would realize after a foreclosure. So what is the advantage of a short sale?

Your credit score does not tell the whole story and future creditors will look beyond your credit score in making lending decisions. The fact that you worked with your former lender to mitigate their damages pursuant to a short sale agreement will be looked upon favorably by most lenders. The fact is, lenders will realize a much greater loss after a foreclosure due to foreclosure costs (legal fees), accumulating loan servicing fees, and perhaps most importantly the costs of the holding and reselling the property. After the lender purchases the property at the Public Trustee Sale, the lender must maintain the property and in many cases will incur substantial losses in reselling the property. By working with a real estate agent to short sale your property, you mitigate these damages on behalf of the lender.

Additionally, as a result of FHA lending standards the purchase of a new home is made much easier after a short sale. To obtain an FHA backed mortgage on a new home the minimum waiting period is five years after a foreclosure. The same waiting period is reduced to just two years after a short sale. (As a side note, the minimum waiting period to obtain an FHA backed loan after filing a chapter 7 bankruptcy is also two years). In some cases, you may need to pursue both a short sale and bankruptcy. The Consumer Law Pro, LLC works with several reputable real estate agencies in the Denver Metro Area and will work with your chosen agent during the short sale process to ensure your interests are protected