Since the mortgage mess started, in 2007, I have never advised a client to participate in a “short sale” of their upside down residence. I cannot find any legal advantage for a homeowner. The lender benefits by having the homeowner market the house and usually procuring much higher sale proceeds compared to the lender’s own fire sale. The biggest beneficiary is the real estate broker. The buyer benefits by acquiring a house at a low price. But, where’s the benefit to the homeowner. The lender almost never releases the homeowner from personal liability so the chances of a lawsuit seeking a deficiency judgment lingers after the short sale just as it does after foreclosure.
The most common reason people give me for their insistence in pursuing a short sale before letting a home go to foreclosure is “credit.” Most people tell me that a foreclosure has a worse effect on the borrower’s credit score, and they assume their credit will recover quicker if they provide the mortgage lender with a buyer in a short sale arrangement. Really?
A week ago, on Saturday, November 27, 2010, the Wall Street Journal, Nick Timiraoas wrote an article about short sales and credit. He posed the question, “Is a short sale as damagin to a borrower’s credit as foreclosure.” His answer was, “Generally speaking, yes.” He explained that in either a foreclosure or a short sale a borrower’s credit score will fall by about 100 points according to Fair Isaac Corp. So, your credit will get hit the same whether you make the effort to short sale your property or simply walk away.
A short sale may have a moral, non-legal. Many people feel a moral obligation to do every thing they can to pay back the bank. That obligation may include finding a buyer for the property to get the bank as much money toward the loan as is possible. Moral obligations are important in life, and I think its admirable for people to try to do a little financial damage as they can to their mortgage lender. I try to assist clients’ decision process by distinguishing moral issues from the legal and credit issues in the short sale procedure.