When I do a bankruptcy should I do a short sale or should I allow my house to go to foreclosure?

I have changed my advice lately.  If clients cannot afford to pay their mortgages I am now advising them to not allow their houses to go to foreclosure and to short sell them instead to save their credit.  Apparently there is now a 5 to 7 year prohibition on getting a FHA loan if you have a foreclosure on your credit report.  With a short sale and even a bankruptcy you will only have to wait 2 to 3 years to get another loan to buy a house.

Many of my clients are behind on their mortgage payments and they often realize that they cannot afford to keep the house.  The payments may be extremely high and beyond their budget and the house is probably also worth far less than what they owe.  They may realize then that the best option is to let go of the house.

Bankruptcy will take care of any debt coming from the deficiency balances of the second or third mortgages but the question becomes whether to allow the bank to foreclose on the home or to short sell it.  A short sale is when the bank accepts less than the amount due on the loan for the home and it is usually negotiated by your realtor.

The realtor first gets you to sign a contract to sell your home just like in a regular sale.  Then it actually gets easier for you because the realtor handles the negotiations with the bank.  The realtor prices the home and then markets it and hopefully gets an offer.  That offer is then presented to the bank for their approval.  Once an offer is in place then the bank must now postpone any foreclosure sale date that the bank has for the sale of the home on the court-house steps.

I recommend that people do short sell their home before the lender forecloses.  This will save their credit so they can buy a new home much sooner.  With home prices so low, now is the time to buy a home.  Don’t lock yourself out of this opportunity to purchase a home when you don’t have to.

For more info. check out my website at:  www.farquharlaw.com

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