Regardless of whether you are in foreclosure, if selling your home won't net enough to pay off your existing mortgage(s), you may want to consider choosing a short sale. For many years, there were few reasons to take this route, apart from earning the real estate agent a commission, but times have changed.
Why Agents Recommend Short Sales
It's not uncommon to hear people say that short sales protect your credit, but that's only partially true. Your credit will tank if you fall behind on your payments, and experts say agents who repeat that mantra without clarification do so out of ignorance or self-interest. There's one exception, though. If you have no late payments—15 days late or more—on your credit report, Fannie Mae might still offer you a loan to buy another home. However, most people who sell on a short sale with Fannie Mae are in default for at least 90 days, so this exception wouldn't apply.
The main reason agents encourage sellers to do a short sale is because agents get paid from the proceeds of a short sale, but they don't get paid if the seller loses the home to the bank by going all the way through foreclosure. Even if the home never sells on a short sale, the agent gets free publicity (and new business) through signage, open houses, marketing, and posting listings online.
Benefits for Foreclosure
Although going through foreclosure is often painful and embarrassing for sellers, there are benefits. There are no mortgage payments to make, the home is still yours until the foreclosure is final—which could take months to conclude—no strangers are traipsing through your home, and banks sometimes give cash for keys after the public sale.
Drawbacks to Foreclosure
Few people, apart from the sellers who choose to buy and bail, really want to experience a foreclosure. Memories are made in a home, and losing it can shatter future dreams. The drawbacks to foreclosures include the right of homeownership being stripped away, a Notice of Public Sale on your front door, and your credit takes a nosedive, with a foreclosure remaining on your credit report for seven years. Under Fannie Mae short sale guidelines, you could qualify for a new loan in two years, rebuilding your life sooner.
Benefits for Short Sale
Choosing a short sale allows you to retain some dignity in knowing that you sold your home, and you won't suffer the social stigma of a foreclosure. You won't have any mortgage payments to make, unless you choose to make them, and under Fannie Mae guidelines, you'll be eligible to buy another home in two years instead of 5–7 years. If your credit report doesn't reflect late payments, under Fannie Mae guidelines you'll be eligible to buy another home sooner than you think.
Drawbacks to a Short Sale
To begin, waiting for the bank to respond to an offer is frustrating. They will want to examine personal records such as tax returns, bank accounts, assets, and liabilities, in addition to asking for a hardship letter from you. There is no assurance the bank will accept a short sale offer.
A short sale could also ruin your credit rating. It might not happen right away, but sooner or later, unless the bank has specifically agreed not to report the shortage, the bank may report it to the credit bureaus, and it will remain on your credit report for seven years. Real estate agents shouldn't give legal advice to clients facing foreclosure or assure sellers their credit rating won't suffer adverse effects.
For many sellers, though, the chance to buy another home in two years is the real motivation to do a short sale. Some sellers qualify immediately to buy again under certain terms. Good credit behavior can supplant bad credit after two years, even though the derogatory will remain.