Many people ask if a short sale is better than a foreclosure in Colorado. This is a good question and there isn’t a one size fits all answer. There are a lot of things to consider but many times a short sale is the better long term option. The main reason is that the deficiency is often lower than with a foreclosure. Colorado is a recourse state (meaning the lender can come back to you for the deficiency if they so choose)
What is a deficiency?
Let’s say your mortgage forecloses and you owe $300k on the mortgage. If the bank sells the home later for a $250k NET then the deficiency you are responsible for is $50k. Legally they can come back to you for that deficiency in Colorado if you foreclose. In real life this is often a debt collector who bought the $50k note for a deep discount. The deficiency can show on your credit and if it’s outstanding, can be a big black eye when applying for new credit lines and often result in denials or very unfavorable terms and rates.
IF you short sale, often the home will sell for more than it would as a bank-owned foreclosure because it’s usually in better condition. It hasn’t sat vacant for a prolonged period of time or had time for pipes to burst, landscaping to die, etc. With a higher sale price the deficiency is less.
In addition, often banks are forgiving the deficiency. Sometimes it’s just forgiven as part of the short sale. Other times they request a promissory note stating that the borrower will pay back a small % of the forgiven balance over X amount of years. The terms of this are all part of the short sale negotiations which is why it’s important to have a savvy short sale agent/broker working for you.
That being said, here is a rough outline of the major differences between Short Sales and Foreclosures. Questions – just holler – Mike – 303-669-2744 x 5 or my email is in the header of this website.
|How short sale is reported will affect credit score
||Can lower credit score by 200 points or more|
|If owner is current with other payments, SS MAY only lower score by 50 points
||Foreclosure remains as public record & credit history for 7 years
|2 years before qualifying to purchase
||5 years before qualifying to purchase