Short Sale Or Foreclosure: Suffering Legal Liability To Help Your Credit Score

Jon Alper Mortgage Foreclosure

The Orlando Sentinel ran a front page article in this Sunday’s paper about short sales and foreclosures. The author stated that while the housing crisis affects all central Florida neighborhoods the wealthier neighborhoods fare better because the homeowners have money to maintain payments while negotiating short sales with the lenders, whereas in less affluent neighborhoods the homeowners are forced to abandon properties and suffer foreclosure. The author states that foreclosures are worse than a short sale for the homeowner because foreclosures have a more damaging and longer lasting effect on the homeowner’s credit rating.

I have never spoke to any attorney who recommends their clients pursue short sales. Not one. I have almost never recommended short sales to my own clients. Credit rating is not a legal issue, but in terms of their legal effect, and particularly asset protection, I rarely see an advantage to a short sale. In the “old days” a short sale arrangement included a release of liability; the lender would accept less than the full mortgage balance and release the mortgage and the underlying promissory note. In today’s mortgage environment a homeowner who negotiates a short sale must remain liable on the promissory note. No release.

Alternatively, if a homeowner refuses a short sale and subjects his home to a foreclosure suit the homeowner can, by defending the foreclosure suit, position himself to negotiate with the lender. Defending a foreclosure suit deprives the mortgage lender of what it wants most of all- possession and control of the property. Attorneys who defend foreclosures – I do not- report to me that in more cases than not they are able during the foreclosure defense to negotiate a release of liability in exchange for the homeowner dropping foreclosure defense.

Although mortgage lenders and real estate salespeople have a different opinion, I think that the only people who benefit from short sales without a full release are the lenders who liquidate the property, the sales agent who makes a commission, and the buyer who gets a good deal on a home. The seller goes through lots of work to negotiate with buyer and lender and in the end he still is legally liable for the full mortgage amount.

Its nice to have a good credit score, but you can’t buy a loaf of bread with a credit score alone. Unless a lender will release your liability in a short sale I think most often the homeowner can negotiate a better deal in the foreclosure process.

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