If you are going to let your house go into foreclosure and walk away, you need to read this quick article. It tells you the advantages of foreclosure over a short sale, and when a shortsale beats foreclosure.

First, by foreclosure we mean selling your house through a trustee sale or sheriff's sale. An involuntary sale. The price that will be obtained is likely to be less than what you owe. The lender automatically puts in a credit bid and will take title to your house. In some states there is a redemption period but essentially the house is gone.

How foreclosure is reported on your credit

Your credit in a real estate mortgage foreclosure situation will be reported as "foreclosure" and in states where there are court foreclosures, there will be a judgment sometimes against you for the deficiency. This judgment will be reported on your credit as a public record.

If you have two mortgages, the second mortgage holder may not get anything. They will be wiped out. Since they did not elect to foreclose, they still have one arrow left in their quiver. They can sue you for breach of contract. Although the lender may not have an appetite to sue you, they can offload the suit to a collection agency or simply sell your loan for a few cents on the dollar to a collection agency who will come after you.

Deficiency judgments and shortsales

Note that deficiency judgments and law suits for breach of contract are dischargable in bankruptcy. Nowadays, you may have to battle a chapter thirteen bankruptcy which involves at least partial payments over many years. A chapter seven is a complete discharge and is harder to obtain with the new bankruptcy laws.

Now, contrast that to a shortsale. A mortgage shortsale involves your selling the house. You take the offer from the buyer, and you submit it with a bunch of paperwork to the mortgage lender. If you have two lenders, you submit the paperwork first to your first mortgage lender, then to the second mortgage lender.

Often, a bit of money will be kicked in from whatever the buyer brings in, and will go to the second mortgage holder (if there is one), to buy them off to the point where they will release the lien on your property to allow the short sale to go through. See avoid a foreclosure short sale - all about non-judicial foreclosure.

How shortsales are reported on your credit

A shortsale is reported on your credit as "paid - settled" or sometimes even "paid - satisfactory." Paid - settled will lower your FICO credit score but not by a lot. And you may be able to get the lender to report as Unrated or simply to report nothing at all. You may be able to persuade the holder of the second mortgage to release you from liability, along with the holder of the first mortgage.

So you walk away with decent credit and you don't have to look over your shoulder for the next four years either, expecting a lawsuit or being hounded by creditors.

That beats walking away from your mortgage, doesn't it?

Watch this important video on short sales and good credit

Type in your email and name to watch this video on shortsales

And now I have a special video for you to watch. It tells you about how to do a short sale on your house. How to keep good credit. All about the IRS and whether you will owe taxes. How to sell your house in nine days. I hold nothing back! Just type in your name and email and I will give you instant access to the video. And I will never share your info with anyone. You can opt out anytime.