As with all things in life, the answer to this question is neither black nor white. There is no easy answer which fits all situations.
For some homeowners, a short sale would be the best alternative. Among other advantages, a short sale is within the control of the homeowner and not the bank so the homeowner can decide if and when the short sale should occur. The short sale would be handled just like any other home sale. Likewise, a short sale would be advantageous for certain homeowners who are not necessarily delinquent in their payments but are foreseeing the probability of reduced finances in the future, hence, are being proactive in trying to prevent the day when they may no longer be able to afford their homes. A major reason why some would choose a short sale over the other options is that it would result in the least derogatory hit on the credit score.
A short sale, however, may not necessarily be possible for all homeowners. For one, a short sale would require the consent of the lender. Unfortunately, not all lenders are cooperative. For those lenders that do cooperate in short sales, many of them have so much on their plates with so many pending applications that getting a timely response from them are next to impossible. These delays result in many homeowners just giving up, or many potential buyers walking away. Also, a major reason why a short sale cannot proceed is because many homeowners have first and second mortgage loans from different lenders. In these cases, you would need the consent of not one but both lenders. If getting a short sale approved by one lender is hard, then getting the consent of 2 lenders is doubly hard.
Thus, when a short sale is not possible others look to foreclosure as an option. For some, however, foreclosure may actually be a more attractive option. In a short sale, the homeowner would necessarily have to move out of the home as soon as the short sale closes. The homeowner will have to incur moving expenses as well as rental expenses for the new place right away. So assuming a short sale occurs in 90 days, that means the homeowner will have to move out in 90 days and start paying rent for a new place. In a foreclosure, however, the process (depending on the state where you live) takes a lot longer to occur. In fact, it is not uncommon for many homeowners to have been delinquent in their mortgage payments for over a year already yet have not been foreclosed by the lender. A homeowner can actually live rent-free in the soon-to-be-foreclosed home. A homeowner, for example, who used to pay $3000 per month on mortgage payments, would be able to save that mortgage money instead and theoretically have $30,000 at the end of 10 months if it were to take the lender that long to foreclose. Though a homeowner may eventually lose the home, he will at least have some cash to tide him over during the difficult times.
For other homeowners, the third option of bankruptcy may be a better option. This may apply to homeowners who have a first and second loan where the second loan was not used to purchase the home, or is a refinanced second loan, or is a home equity line of credit (HELOC) loan. Why? Because in a foreclosure, the homeowner’s obligation under the second loan may not necessarily be wiped out. Homeowners should be aware that just because their home has been foreclosed, doesn’t mean that lenders will no longer run after them for the unpaid balance. The First lender may have no recourse against the homeowner, but the second lender may still do. Another reason why bankruptcy may be the better solution for some homeowners is that many homeowners not only have mortgage obligations but also huge personal obligations (such as credit card bills, medical bills, etc) which are still weighing them down. If a homeowner were to already take a hit in a foreclosure by getting rid of a mortgage that can no longer be afforded, it just makes sense to also get rid of personal obligations (usually credit card bills) that also continues to drain them financially. Thus, a bankruptcy does make sense for some homeowners who want to start from the starting line instead of from a negative line.
(DISCLAIMER: material presented above is intended for informational purposes only. It is not intended as professional advice and should not be construed as such. Rey Tancinco is a partner at Tancinco Law Offices, a professional corporation with offices in San Francisco, Vallejo, and Manila. The law office website is at: tancinco.weareph.com/old. Rey Tancinco can be contacted at (800) 999-9096 or (415) 397-0808 or via email at: attyrey@tancinco.com
