In comparison to a Foreclosure, there is no disadvantage to a Short Sale.  A Short Sale is when a home is sold to a new buyer and the sales price is less then the face value of the mortgage or loans owed on the property, plus any back payments, interest, plus traditional closing costs such as Title, Escrow, Real Estate commissions, back Property Taxes and HOA fees.

The main advantage of a Short Sale is it is much less damaging to credit standing.  First of all, many credit counselors state that a Short Sale will stay on ones credit report for about 1-4 years, while a Foreclosure will stay on the credit report for up to 7 years. An experienced credit counselor may be able to have the Short Sale removed from ones credit report in less time. Some lenders and credit consolers claim that a Foreclosure will damage ones credit by as much as 200 points more then a Short Sale.  If one intends to borrow money in the next 7 years for another home, a car, boat, etc., this can make a huge difference in ones ability to get a loan and a difference in what the interest rate will be.

This is so important for most homeowners as it is not their desire to have to give up their home, let alone having to be humiliated by the foreclosure process. The Short Sale offers a BIG ADVANTAGE as it offers a sense of dignity and responsibility.  During a Short Sale, the homeowner is marketing the home for sale with a local Realtor (who hopefully has vast experience with Short Sales), in an attempt to sell the home at the best price thus bringing in as much money as possible to the Bank.  When the home is sold to a new home buyer, the homeowner moves out at the closing of escrow in an orderly and dignified manner, just like any other home sale transaction. This is a relatively painless resolution to a difficult situation. On the other hand, after the Foreclosure sale, you are forced out of the house by court eviction.  Then the home usually sits vacant as the grass turns brown, and newspapers collect in the driveway.  Then in about 4 to 6 months, a local Realtor is hired by the foreclosing bank and 'Foreclosure for Sale' signs are posted on the property. This can be a very humiliating ending to a painful process.

What are the hurdles or disadvantages of conducting a Short Sale, as compared to a Foreclosure?  One, the home owner must be essentially broke... that is to say, the property owner must prove to the bank that they are ill-liquid and essentially unable to make your mortgage payments.  If one has a good source of income and/or significant sums of money in the bank, the mortgage lender will most likely decline the Short Sale request and demand that the homeowner make up for the Short Pay with their own cash. It is possible that the lender will negotiate with the homeowner to carrying a new but smaller note to be paid back to the bank if the homeowner´s show a strong income.

The other hurdle is that the home owner may be liable for federal income tax based upon the income generated by the debt relieve.  This does not always happen, and congress is now considering a bill to remove this penalty from the Tax code. Actually, compared to a Foreclosure, this is not a disadvantage, for this same potential Tax consequence can happen as a result from a Foreclosure as well.