In such a scenario, foreclosure is often better. First, with a foreclosure often times the bank will buy it back itself for what it owed. So, in my above example the bank would buy it for $200, 000. Here there wouldn’t be a deficiency balance. Second, many states have a redemption period in which you can live in the house after the foreclosure sale. So often times you can live in the house for free for a long time before the bank takes possession. You may be able to save significant funds if you are not paying a mortgage. Those funds can be used to negotiate a deficiency balance pay off if the bank sells it at a foreclosure sale for less then owed (and you live in a state that allows banks to go after deficiencies after such a sale).

Also, some states do not allow the collection of a deficiency balance after foreclosure, but often times the bank will require you to sign a promissory note during a short sale agreeing to pay back money that you wouldn’t have to if it is sold.

So, in summary short sales usually are only good if you don’t owe any money after the sale, which typically is not the case.

James I agree with you on trying to help your credit.

Short sales can be much better than full foreclosures, and I tried to write a long informative article in my state to help answer a lot of questions.

http://www.minnesotainvestors.com/blog/what-short-sale-information-minnesota-short-sale-process/

And I know, believe me. I have lost all my savings by investing in real estate. Although I was cautious and have been putting 20 to 30% down. I still got in trouble because of a high vacancy rate.

So let me share some experience.

When you see it coming and you know you’re going to fall behind, you are desperately trying to save your credit.
So first thing you do is trying to be pro active.
You call the bank, explain the situation and ask for a loan modification or any other help.
And what do they reply?
Sorry, can’t help you.
Why?
You’re not behind in payments.
So? You’re telling me that I have to stop paying in order to get you to help me?
Uhh,

It’s so frustrating but it is a fact, you have to stop paying for them to listen or help!
Well, when you stop paying, your credit gets a hit.
Result of that is that they won’t help you because now you have bad credit.
So, they are shooting themselves in the foot.

Now, here’s the deal.
In a short sale the bank accepts a lower payoff, they waive deficiency Judgment and it appears on your credit report as a settled debt.
That’s much better than a foreclosure or judgment.
Now You’ll be able to apply for another loan in about 18 months.

Why would a lender do that?
They look at the actual value of the property, that means today’s value, Not what you owe.
Because they know if they foreclose they are only going to get market value or below anyway.
On top of that, a foreclosure is costing the lender on average $50,000 and it is bad for the lenders credit score as now they have an increase in foreclosures. So they are seen as bad lenders, and as a result of that they need more reserves, that means less money to work with.

Are you still with me?
The best is yet to come
So, Now the lender accepts my buyers short sale offer, forgives me the difference in what I owe and what the property is sold for AND waives deficiency judgment against me.

Good Stuff.

Now watch out!
When you decide to go that route, make sure that you use a licensed Realtor or specialized processing company. Don’t try this on your own!
Do you due diligence, ask the Realtor how many short sales he has successfully done, check out the Better Business Bureau. Because time is of the essence. And the clock is ticking.
Also once you work with someone, keep checking with your lender, nothing wrong with checking if your Realtor does his job.

Last but not least, make sure you have an offer on the property!
Any offer will do.
Why?
Because, again, your Lender won’t move as long as you don’t make him to.
Why does an offer make them move?
They have to, because if they don’t, you will tell the Judge.
So, now they appoint an appraiser, they check out the value and will get back to you with a Yeah or Nay.
When it’s a Nay, you’ll know how much they are looking for and believe me they are not unreasonable.
As long as you or your Realtor don’t come up with one of those ‘investors’ offers and try to steal the property from the bank, they will accept any offer that is close to market value.

So what are you waiting for?
Get that Monkey Off of Your Back!
Go short sale!

Some people can prevent foreclosure by working with their current lender and creatively finding a way to remain in the same home. There is also way to get out of this by taking a second mortgage. This is better only for those who have chances of bettering their financial situation atleast in the future.

As the credit history of the homeowner is important it is always better for him to choose a short sale to prevent home foreclosure.

You’ve heard of them – VA, FHA, etc. The chances of a lender accepting a short sale with an insured loan are slim to none.

Why?

Duh! They get paid either on the court house stairs by a foreclosure investor or, if it doesn’t sell, immediately after the sale closes.

The best advice w/a short sale is to start as early as possible in the process. By early I mean the minute you even suspect you won’t be able to meet your payments.

Talk w/your lender about their short sale procedures. Believe me, they will tell you. This is definitely one of those areas where you will need to do your homework.

You may still need to sell your home for other reasons – but keep your wits about you if you want to get a decent credit rating in the future.