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Deficiency Judgments: Short Sale vs. Foreclosure

Deficiency Judgments: Short Sale vs. Foreclosure
I have a bone to pick with some of the writers doing "mortgage crisis" pieces for prominent news services. Several times within the last week I have read articles that discuss deficiency judgments post short sale and post foreclosure. Each of the articles I read warned sellers of the possibility of a deficiency judgment even if they do a short sale. As if to say, you may as well allow your home to go to foreclosure rather than attempt a short sale. My gripe, though, is that not one of them pointed out a very important nuance. 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! A statistical analysis of foreclosures vs. short sales 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. So, on average, even if a deficiency judgment cannot be averted it will be about 10% less with a short sale than with a foreclosure. 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 with 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.

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