Foreclosure or Short Sale: Which is Better for the Borrower and the Lender?

Q: I refinanced my California home in 2006, rented it out, and bought a home in Arizona. Now the mortgage balance on my California home is higher than what my house is worth and my renter is leaving.

I simply can’t afford the payments, which seem to increase each year. Is my Arizona home in jeopardy if I walk away from the California home?

A: You’re in a tough spot, one shared by hundreds of thousands of other homeowners.

The good news is that in many states, lenders can’t go after you for the deficiency - that is, the difference between what the bank gets from the sale of your home and what you owe on the debt.

There are just so many homes going through foreclosure and short sale that lenders are eating their losses and in most cases have not opted to chase borrowers for the deficiency.

But the truth is, lenders today get much more money when the borrower goes through the short sale process than through foreclosure. In some cases lenders only get 30 to 40 cents on the dollar in a foreclosure but will get 60 to 80 cents on the dollar with a successful short sale.

Most lenders are finding that a short sale is much better for the lender than having to take the property over and sell the home through foreclosure. While a lender may have the legal right to go after your assets, including your home in Arizona, for practical purposes the lender probably will not. Also, California is one of those states where lenders are limited in their ability to obtain deficiency judgments.

Read the full article at ThinkGlink.com for my full answer, including how a foreclosure or short sale could affect the homeowner's credit score.