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So I have a relative who has been behind in his mortgae payments in Phoenix AZ.
So they stopped making payments on the house in December 2010 and recently on 6/7/2011 received
1) A statement of breach or non-performance and election to sell under deed of trust Arizona.
2) Notice of trustee's sale Arizona
3) Debt Validation Notice.
He received a short sale offer yesterday. What are the advantages for him doing a short sale as opposed to just waiting for the bank to foreclose?
He won't have a foreclosure on his credit report if he is able to do a short sale.
And equally important to some people, the process while still slow, is generally quicker than foreclosure. If he wants to get on with his life, and get out from under this house, he can probably achieve that faster with a short sale.
A short sale can still be a ding on your credit though. Just less of a hit than a foreclosure, especially if you keep up on your payments through the process.
And yes, it can make the process done faster, but is a lot more painful than a simple foreclosure. A foreclosure, you just live there until they tell you the house has sold. On a short sale, you have to give your bank half of your financial life history. But you typically are done with the process faster, so you can start rebuilding your credit. Also, if you have a 1st and a 2nd, a foreclosure will show them both as negative. But if you are only slightly underwater, and can get enough to pay off the first in full, then only the 2nd will show as negative, which isn't as bad. Of course, if you also stopped paying your mortgage on the first and second, they will both show as negatives anyway.
Short sales also carry the risk of a deficiency judgment, and/or tax consequences. Although I think I remember hearing that Arizona is one of only a few true non-recourse states (meaning they can't come back with a deficiency judgment). I'd say check with his accountant AND attorney before deciding whether to accept.
So yes, if his credit is otherwise good, a short sale will hurt it least. And if he wants to move on quickly, a short sale (typically) is faster, especially if his loan is with one of the banks using the equator.com system (Wells Fargo, BofA (Conventional loans only), Nationstar, and a couple I haven't heard of). But if he wants to stay free as long as possible, or if his credit is already shot, there really isn't a lot of incentive to jump through the short sale hoops.
If I weren't the crazy nut that I am (who refuses to ever forfeit on any debt, even if I have to work 3 jobs to do it) if I was not able to make my payments and had no choice but to lose the house and ruin my credit by doing one or the other, I would let it foreclose, file bankruptcy (if I had any other debts) and then start over. It would still suck, but I think that would be the least painful route.
I'd say check with his accountant AND attorney before deciding whether to accept.
I agree with this. Each situation is different and there can be various tax and legal consequences. Usually a short sale creates less of a ding on your credit and you can buy another home quicker than foreclosure, but be sure to check with a CPA and lawyer licensed in his state!
I've heard of cases were when doing a short sale does qualify you to get another mortgage, unlike foreclosure :/ if you really want to keep the home consider a short refinance!!
Az is non-recourse if the property actually goes to trustee's sale. If the short-sale agreement with the bank isn't written properly, it's possible for a seller to get sued or still owe money after the sale.
The primary advantage of completing the short-sale is that they (might) possibly be able to purchase another property with a federally-insured loan sooner if they do the sale, and if they repair their credit. If your family member hasn't been making payments since December, their credit is hosed. Six months of missing payments likely dropped their Fico scores 300+ points.
Many agents will talk about some of the loan programs allowing a new purchase 2-4 years after a short-sale, the problem is, those rules are only for those who've managed to bring their credit score back up somewhat.
Getting a mortgage today with a 760+ fico, a great job & no credit problems (ever) is still a major pain. I wouldn't even want to try it with a foreclosure or a short-sale anywhere on my credit report.
No matter what they decide - make sure they pay for an hour's consult with an attorney. Everyone's situation is different, and some of the legal issues /advice out there have never been tested in court.
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