October 1st, 2010 8:13 AM by Dave Gubler
"I'm losing my home either way; by foreclosure or short sale. So why should I do a short sale Dave?"
In one form or another I've been asked this question from many struggling homeowners considering their options. It is a complicated question that has a different answer for every individual or family wrestling with mortgage hardship. (It is also a question that deserves more than one blog post.) Here is one of many potential reasons...
REASON #1: Deficiency JudgmentAfter foreclosure or short sale your lender may have the right to sue you for the deficiency between the amount realized by liquidating the property and the amount you owed them. Essentially your loan (or loans) are either "recourse" (which means the lender has a right to recover losses) or "non-recourse" (which means your lender has no legal right to seek a judgment for losses). If the loan was utilized to purchase your home it is "non-recourse" and you need not be concerned about deficiency judgments (check back for part 2 of this series for other reasons though!) All other loans after purchase money transactions are likely going to be "recourse" loans (there are some exceptions) & you are vulnerable to a deficiency judgment. The Short Sale Process provides an opportunity to negotiate with your lender in order to waive or eliminate a lender's deficiency rights on "recourse" loans. Foreclosure does NOT!
This nuance is a vitally important difference. Yes, a deficiency judgment is possible in a short sale; sometimes even unavoidable. Said deficiency judgment will be even larger if the same home is foreclosed on! This is common sense. Any analysis of foreclosure vs short sale clearly demonstrates that the loss incurred by banks in foreclosure is, on average, greater than the loss incurred for short sale. That is the whole reason banks agree to do short sales rather than foreclose... they lose less money by doing so. Sorry to burst your bubble if you thought it was because they have compassionate regard for their borrowers.
A good short sale agent should be experienced at eliminating deficiency judgments via negotiation. Is it possible in every case? Certainly not; but a skilled negotiator knows how to improve the odds. The bottom line is this... the dollar amount of any potential deficiency judgment is very likely going to be greater, often much greater, if foreclosure is the resolution rather than short sale. Across most markets and in most cases the bank reduces their loss by about 10% with a short sale vs. foreclosure. Every bank has different policies and each market and scenario are different but as generalizations go this a pretty solid figure. Even if a deficiency judgment cannot be averted it will be about 10% less with a short sale than with a foreclosure (this is a bit of an over-simplification but true in general). There are, of course, other reasons to pursue a short sale rather than a foreclosure (reduced impact on credit, ability to obtain Fannie/Freddie loans again within two years vs. five years, etc.) and these should be considered as well. Is a short sale a "hassle"? Sure, most would agree that it is, but as with all things in life it usually isn't worth doing if it isn't a bit difficult.
Other potential reasons to short sale (to be discussed in the near future):
1. A strong likelihood of remaining in the home longer than you would if foreclosure proceeds.
2. The ability to obtain Fannie Mae & Freddie Mac mortgage financing again after 2 years.
3. Less overall damage to and a shorter duration of negative impact to your credit rating.
4. The dignity of selling your home rather than being evicted by the bank once foreclosure occurs.
One footnote I feel I should add is that your lender is not obligated to sue you for deficiency judgment on a foreclosed (or short sold) "recourse" loan. In many cases they do not exercise this option. Who wants to have the potential for a judgment against them hanging over their head years in to the future though?