Foreclosure vs. Short Sale in Georgia

foreclosureThere are many different factors to consider when you are facing the unfortunate decision of choosing between a foreclosure and a short sale.  You have to not only look at how your decision will affect you now, but how it will affect you in the future as well.  As far as a conventional mortgage goes, if you foreclose you would have to wait five years to purchase again (3 years with extenuating circumstances).  With a Short sale it can be as little as 2 years with extenuating circumstances.  There has been debate for some time on how FHA views foreclosures, but on HUD’s most recent mortgagee letter, they basically clarify that they consider a foreclosure the same as a short sale.  This means you would have to wait 3 years to get a new FHA mortgage after a short sale or foreclosure.  They did state that if the mortgage was reported paid in full and there were no lates on the mortgage, you wouldn’t have to wait the three years.  Normally the only way to qualify for a short sale is the fact that you are late on your mortgage and can prove a hardship, so waiting three years will most likely be the standard.
Your credit score is a big factor in making a decision as well.  With a foreclosure, your credit score will typically drop 225-300 points.  It would normally take 3 years for your score to get back to normal.  With a short sale, only the late payments will show, which will typically drop your score 75-125 points.  This would normally take 12 to 18 months for your score to recover.  A foreclosure will remain on your credit report for 10 years, where a short sale won’t.
There are two other big items to consider when deciding between a foreclosure and a short sale.  When you do a short sale, the lender may 1099 you for the amount forgiven.  If you owe $200,000 and the short sale ends up at $150,000, you may have to pay taxes on the $50,000 that is forgiven.  The same is possible on a foreclosure if the bank pursues a deficiency judgment.   Something you should also consider is security clearance.  If you are in or planning on going in the military, FBI, Secret Service, etc., you would need to know you can lose your security clearance by having a foreclosure and in some cases your position is terminated.  A short sale typically does not have the same affect.
The rules on short sales and foreclosures are changing as the market changes.  Check back for more updates.

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