The residence leaves the borrower's name in both a short sale and a foreclosure, but the journey to that conclusion differs greatly in terms of damage, timeliness, and what the borrower is left with at the end. This article explains nine distinct distinctions, such as credit, taxes, deficiency exposure, and future mortgage eligibility, so a distressed homeowner can match the appropriate course of action to the real circumstances.
Every borrower situation is different, and that is never more true than when someone is facing the loss of a home. The conversation usually starts the same way: a missed payment, then two, then a notice in the mail, and from there the homeowner is suddenly forced to learn the difference between two words that used to sound interchangeable. A short sale and a foreclosure both end with the same outcome on paper. The home is no longer in the borrower's name. But the road to get there, and what the borrower is left holding when it is over, can look almost nothing alike.
This guide is written for the homeowner who is not in default yet but can see it from where they are standing, and for the homeowner who is already there and is trying to figure out what to do next. The goal is to lay out the actual mechanics of each path, to be specific about credit, timeline, taxes, and future home-buying eligibility, and to help separate the urgent from the merely loud. At AmeriSave, we talk to borrowers every week who are in some version of this conversation, and the single most useful thing a homeowner can do early is understand what the choice actually is.
Both paths look like the same outcome from a distance: the homeowner ends up not owning the home anymore. Up close, they are kind of different transactions with different parties driving the timeline.
Selling a house for less than the outstanding mortgage sum with the lender's written consent is known as a short sale. The "short" is the difference between the borrower's debt and the sale price of the house. The lender must consent before the sale can finalize since they own that gap.
The borrower, not the bank, is where the mechanics begin. A homeowner calls the loan servicer to request consideration for a short sale if they are behind on payments or can tell they won't be able to keep up. The servicer then asks for a hardship letter outlining the borrower's inability to make further payments. A divorce, a medical condition, a job loss, or a permanent drop in income are examples of common challenges. Bank statements, recent pay stubs or evidence of income loss, recent tax returns, and a written summary of the borrower's monthly budget are examples of supporting documentation. The Consumer Financial Protection Bureau states that, in accordance with Regulation X of the Real Estate Settlement Procedures Act, servicers must assess borrowers for potential loss mitigation options, such as a short sale, when a complete application is submitted. This evaluation must take place prior to scheduling a foreclosure sale.
The house is listed for sale like any other after the servicer approves the borrower's short sale and acknowledges the hardship. Buyers must be patient and be informed by the listing agent that the offer is contingent to lender clearance. Approvals for short sales frequently take weeks longer than those for standard purchase contracts. When a buyer makes an offer, it is sent back to the loan servicer along with any holders of junior liens, like a second mortgage or HELOC, for a final yes or no.
The deficit is the component that surprises the majority of homeowners. The $40,000 difference does not just disappear if a lender accepts $300,000 on a property for which the borrower owes $340,000. The lender retains the right to pursue it as a deficiency at a later time, forgives it, or obtains it on a promissory note. The most crucial issue a borrower can ask during the negotiation is which of those occurs, and it is controlled by both state law and the short sale agreement. Below is further information on that.
A deed in lieu of foreclosure is not the same as a short sale. The homeowner willingly returning the keys to the lender without a sale is known as a deed in lieu. Although the two are distinct transactions with different paperwork and different downstream implications, they are commonly combined because they are both options to foreclosure.
Borrowers frequently overlook the fact that all parties having a lien on the property must cooperate in a short sale. The junior-lien holder must additionally approve the payback or release if there is a home home equity line of credit, or second mortgage on top of the first. In certain cases, junior lien holders have less to lose by declining. The second-lien holder will occasionally hold up a short sale by seeking more than the proceeds will cover because if the property goes into foreclosure, the second lien may be wiped out nevertheless. One of the most frequent reasons short sales fail is that negotiation, therefore the homeowner should inquire about it upfront. Because second-lien risk is the factor that causes so many transactions to fail, the AmeriSave loss mitigation team brings it up at the beginning of every short sale discussion.
When a borrower stops making payments, a lender can legally take possession of the property through foreclosure. It is started by the lender, not the borrower. A condition allowing the lender to seize the property as collateral in the event that the loan is not repaid was previously included in the mortgage, thus homeowners are not need to consent to a foreclosure for it to occur.
The state in which the property is located determines which of the two primary types of foreclosure applies. Judicial foreclosure, which is used in around 22 states, requires the lender to file a lawsuit, serve the borrower, obtain a judgment, and then have a sheriff or court-appointed officer auction the property. Judicial foreclosures give the borrower more procedural rights, such as the ability to challenge the lender's case in court, but can take longer—typically a year or longer from the first missed payment to the auction. Non-judicial foreclosure, which proceeds through a power-of-sale clause in the mortgage or deed of trust without a lawsuit, is permitted in the remaining states. The borrower's options are more constrained in non-judicial foreclosures, which typically take four to nine months from notice of delinquency to sale.
On the timeline, the federal floor is important. In accordance with CFPB servicing regulations included in Regulation X 12 CFR 1024.41(f)(1), a servicer is often not permitted to file for foreclosure until the borrower has been past due on the loan for more than 120 days. The purpose of the 120-day pre-foreclosure period is to give the borrower an opportunity to request loss mitigation. After that floor, everything depends solely on state law, including whether the lender must file a complaint and serve the borrower, how long the borrower has to reply, whether mediation is necessary prior to sale, and how the auction is held.
Ownership of the property passes once it is sold at auction, either to the highest bidder or, more frequently, back to the lender as real-estate-owned (REO) property in the event that no third party places a high enough bid. In many areas, the sale is final as soon as it closes, but in others, borrowers have a right of redemption that allows them to purchase the property back by paying the entire debt plus costs within a certain window after the sale.
Once more, there is a deficiency if the amount owed is not covered by the auction price plus the borrower's equity; whether the lender is able to collect it depends on the type of loan and state legislation.
At the auction, the majority of repossessed properties are not really sold to a third-party bidder. When a property is underwater, the lender's starting bid—which is usually the outstanding loan debt plus accumulated fees—is higher than what an investor is willing to pay. Because of this, the property typically returns to the lender as REO. The lender then lists it with a real estate agent and sells it on the open market, frequently for less than fair market value. From the borrower's point of view, the auction marks the transfer of ownership; the lender's subsequent actions regarding the property have no bearing on the borrower's exposure to the loan or the credit reporting outcome.
The most useful way to understand these two paths is to put them next to each other on the specific pressure points that matter to a borrower. Below are the nine differences that come up most often in real conversations with homeowners.
Short sales are borrower-initiated. Homeowners are the ones who reach out, apply, gather documents, and sign the listing agreement. Foreclosures are lender-initiated. Once the loan is far enough in default and loss mitigation has been declined or has failed, the lender is the party that files the notice of default, hires the foreclosure attorney, and schedules the auction. Control sits in different places, and that single fact drives most of the other differences.
Short sales typically take four to twelve months from the first conversation with the servicer to a closed sale, with the bulk of that time spent waiting for lender approval on a buyer's offer. Foreclosures can take anywhere from four months to over a year, with judicial-foreclosure states often pushing well past twelve months. On track, a short sale is usually slower at the front and faster at the close; a foreclosure is the opposite.
Both events damage credit, but they do not damage it identically. According to FICO, a foreclosure can drop a score by roughly 85 to 160 points, with the larger drops happening for borrowers who started with higher scores. A short sale is reported on a credit file as the account being settled for less than the full balance, and FICO data suggests a drop of roughly 50 to 150 points, again skewed by starting score. The single biggest credit factor in both cases is not actually the foreclosure or the short sale itself. The biggest factor is the late-payment history that led up to it. Borrowers who manage to negotiate a short sale before falling deep into delinquency often see meaningfully smaller score drops than borrowers who let the loan go to auction.
Credit-rebuild paths also differ. Maybe the short-sale path doesn't make sense for a borrower with no equity, no buyer market, and a deeply delinquent file — by the time that borrower finds a buyer, the late-payment trail is already deep. But for a borrower who pulled the trigger early, while two months delinquent rather than nine, the rebuild trajectory is meaningfully steeper. Score recovery within 12 to 24 months is realistic with on-time payments on remaining accounts and low credit-card utilization. After a foreclosure with the full trail of 30-, 60-, 90-, and 120-day late payments leading into the sale, that trail itself is a long-term drag on the score, separate from the foreclosure entry. AmeriSave loan officers who work with post-event borrowers see this pattern regularly: the borrower who shorted the home with two months of late payments rebuilds faster than the borrower who let nine months pile up before the auction.
Future eligibility is the place where the two paths diverge most sharply over the long run. The waiting periods before a borrower can qualify for a new mortgage are set by the loan program, not the lender, and they treat short sales and foreclosures very differently.
After a foreclosure, conventional loan programs administered by Fannie Mae and Freddie Mac generally require a seven-year waiting period, with reductions to three years possible if the borrower can document extenuating circumstances such as a serious illness or job loss outside their control. After a short sale, conventional waiting periods drop to four years, with the same potential for a two-year reduction if extenuating circumstances are documented.
FHA programs are administered by the U.S. Department of Housing and Urban Development. According to HUD's single-family handbook, FHA generally requires a three-year waiting period after a foreclosure and a three-year waiting period after a short sale, though FHA may permit shorter timelines in cases where the short sale occurred while the borrower was current on their mortgage and the hardship was the result of an external life event.
VA loans, administered by the U.S. Department of Veterans Affairs, generally require a two-year waiting period after a foreclosure or a short sale, though VA underwriters can consider re-establishing credit and the surrounding circumstances. USDA loans typically require a three-year waiting period after a foreclosure.
Bottom line: every borrower you talk to is a completely different file, but if the plan is to buy again, the difference between a short sale and a foreclosure can be three years or more on the same loan program. That is not a small thing.
When a lender forgives a portion of mortgage debt — which is what happens in most short sales and many foreclosures — the IRS has historically treated the forgiven amount as taxable cancellation-of-debt income. Two exclusions matter most for distressed homeowners, and borrowers should know about both.
The first is the qualified principal residence indebtedness (QPRI) exclusion. Created by the Mortgage Forgiveness Debt Relief Act of 2007 and extended by Congress several times since, the QPRI exclusion lets a borrower exclude forgiven acquisition debt on a primary residence from taxable income up to a defined cap. The most recent extension under the Consolidated Appropriations Act, 2021 set the cap at $750,000 for most filers ($375,000 if married filing separately) and was scheduled to apply through January 1, 2026. Whether the exclusion remains in effect for discharges after that date depends on whether Congress has extended it again. Any borrower facing a short sale or foreclosure should check the most current IRS Publication 4681 — or ask a CPA — for the current QPRI status before assuming the exclusion applies.
The second exclusion is the one that does not expire: the insolvency exclusion under Internal Revenue Code Section 108(a)(1)(B). If a borrower is insolvent immediately before the debt is canceled — meaning total liabilities exceed total assets — cancellation-of-debt income can be excluded up to the amount of the insolvency. Insolvency is a permanent provision in the tax code, not a temporary extension. For most distressed borrowers, this is the backstop, and it often applies even when QPRI does not. Publication 4681 walks through the worksheet for calculating insolvency.
IRS Form 1099-C is the form to watch for. Lenders are required to issue a 1099-C when they cancel $600 or more of debt, with copies to both the IRS and the borrower. Receiving the 1099-C is the trigger for the IRS to expect the cancelled amount on the borrower's tax return. Whether some or all of it is excludable depends on whether QPRI applies, whether insolvency applies, and what type of property and loan are involved. A CPA or enrolled agent can apply these rules to a specific situation.
A deficiency is the gap between what the borrower owes and what the lender recovers from the sale of the home. Whether the lender can collect that gap from the borrower personally is a question of state law and of the specific paperwork signed at the start of the transaction.
Short sale agreements often include language addressing the deficiency directly. The agreement either fully releases the borrower from the deficiency, settles it for a smaller amount on a promissory note, or reserves the lender's right to pursue it. A borrower who signs a short sale agreement without confirming which of those three is happening is leaving the most important number in the room undecided.
Foreclosure deficiency rules are governed by state statute. Some states block deficiency judgments entirely after a non-judicial foreclosure on a primary residence. California, for example, has anti-deficiency protections under Code of Civil Procedure sections 580b, 580d, and 580e that limit when a lender can pursue a deficiency on owner-occupied purchase-money loans. Other states allow deficiency judgments but cap them, often by limiting the amount to the difference between the loan balance and the property's fair market value rather than the auction price. A handful of states allow full deficiency collection. The borrower's outcome can be very different in two states with otherwise similar facts.
A foreclosure is a court or county-recorder filing in nearly every state. Notice of default, notice of sale, and the deed transfer are all part of the public record, and they often appear in local newspapers and online listing sites. By contrast, a short sale on the public record looks like any other sale. While the deed transfer is recorded, there is no notice of default or auction filing tied to the borrower's name. Credit-report wording also differs. Foreclosures are reported as "foreclosure" or "foreclosed account"; short sales are reported as "settled for less than the full balance" or "paid in full for less than full balance." Both are negative, but the language is read differently by future lenders, by employers running credit checks, and sometimes by the homeowner's own community.
During a short sale, the homeowner stays in the property until close, lists with their chosen real-estate agent, and has input on the listing price, the staging, and the timing of showings. The lender controls whether the offer gets approved, but the homeowner controls almost everything else about how the sale presents to the market.
Foreclosure runs differently. Once the legal process starts, the homeowner's control evaporates. The lender hires its own attorney, sets the auction date, and after the sale, can pursue eviction if the borrower has not already left. The homeowner can still pay off the loan in full to stop the process at any point before the gavel falls in some states, but that level of cure is out of reach for most distressed borrowers.
Short sales close as marketed listings, sold to a willing buyer, at something close to fair market value (with a discount for the patience and uncertainty of waiting on lender approval). Foreclosures close at auction, often with limited inspection and limited financing options for buyers, and the sale price is frequently below fair market value. That gap matters because it usually translates into a larger deficiency, which is the borrower's problem in any state that allows the lender to chase it. From a community standpoint, foreclosure auctions can also pull down comparable home values in the immediate neighborhood, while short sales tend to track market pricing more closely.
Point-by-point comparison is useful, but borrowers also need to know what each path actually feels like in motion. The two sequences below trace what typically happens from the first sign of trouble to the final closing or sale.
Most short sales begin with a phone call or letter to the loan servicer. From there, the borrower explains the hardship and asks to be considered for loss mitigation, including a short sale. In response, the servicer sends a packet of forms. That packet typically includes a hardship letter template, an authorization for release of financial information, and a schedule of supporting documents such as recent pay stubs or unemployment notices, two months of bank statements, two years of tax returns, and a household budget. Once the borrower completes the packet and returns it, review begins.
Servicer review is the bottleneck. If the borrower qualifies, the servicer issues a short sale approval, often with a target net proceeds figure or minimum acceptable sale price, and the borrower lists the home with a real-estate agent who has experience working through short sales. The listing agent prices the home, takes the listing live, and discloses to all buyers that the offer is subject to lender approval.
When a buyer's offer comes in, the agent submits a short sale package to the servicer that includes the executed purchase contract, a settlement statement showing the lender's net proceeds, an updated comparative market analysis, and any junior-lien payoff figures. The servicer, along with any second-lien holders, evaluates the offer. If approved, closing is scheduled, the buyer's funds and the lender's release of lien meet at the title company, and the sale closes.
Borrowers should ask three questions before signing a short sale approval: Is the deficiency forgiven, settled, or reserved? Will the lender issue a Form 1099-C for canceled debt? Will the lender provide a written waiver of any future collection action? At AmeriSave, we tell borrowers to get every one of those answers in writing before they touch the signature line.
A foreclosure does not start with a single event — it starts with a sequence. Under CFPB Regulation X 12 CFR 1024.39, the servicer is required to make good-faith efforts to establish live contact with the borrower no later than 36 days after the borrower becomes delinquent, and to provide written notice of available loss mitigation options no later than 45 days after delinquency. Those two early-intervention requirements exist specifically so the borrower hears about loss mitigation before the foreclosure clock advances. The federal floor on the first official foreclosure filing — under 12 CFR 1024.41(f)(1) — is 120 days of delinquency.
Once the formal process begins, the path depends on state law. In a judicial-foreclosure state, the lender's attorney files a complaint, serves the borrower, and asks the court for a judgment of foreclosure. Borrowers have a defined window to respond, often 20 to 30 days. If the court rules in the lender's favor, the property is set for sale and a sheriff or court officer conducts the auction. The sale gets confirmed by the court, and the deed transfers.
In non-judicial states, lenders record a notice of default, wait a statutory period, record a notice of sale, and conduct the auction at a designated location, often the county courthouse steps. Trustees handling the sale execute a trustee's deed, and ownership transfers at the auction.
After the sale closes, the lender or new owner can file for eviction if the borrower has not vacated. States with a post-sale right of redemption give the borrower a defined window to repurchase the property by paying the full debt and costs. Without that right, the sale is final.
Before a borrower commits to a short sale or accepts a foreclosure, there are alternatives that should be on the table. CFPB rules require servicers to evaluate complete loss mitigation applications and offer borrowers any options for which they qualify. Most loss mitigation menus include some combination of the following.
Loan modification changes the terms of the existing loan — typically by lowering the interest rate, extending the term, or capitalizing missed payments into the loan balance — to bring the monthly payment down to something the borrower can sustain. Modifications are the option that most often saves the home, and they are usually the first thing the servicer will evaluate.
Forbearance temporarily pauses or reduces the borrower's monthly payment for a defined period, with a plan to make up the missed amounts later. This option fits a borrower whose hardship is temporary, such as a short-term medical event, a layoff with a clear path back to work, or a natural disaster recovery. It is not appropriate for a borrower whose income loss is permanent.
Repayment plans spread out missed payments over a defined number of months on top of the regular monthly payment. They work for borrowers who can resume current payments and have enough margin to also catch up on the arrears.
Deed in lieu of foreclosure is a voluntary handover of the property to the lender, typically in exchange for a release from the loan. This route shows up on credit similarly to a foreclosure but avoids the legal process, the public-record filings, and the auction. It also generally requires that the property has no other liens, since the lender does not want to take title to a property with junior claims attached.
Free housing counseling from a HUD-approved counselor is available to any homeowner facing distress. The HUD counselor list is published on the agency's website, and counselors can help a borrower compare options, build a hardship package, and negotiate with the servicer at no charge.
Borrowers should also be aware of the CFPB's anti-dual-tracking rule. Once a borrower submits a complete loss mitigation application more than 37 days before a scheduled foreclosure sale, the servicer is generally prohibited from moving the foreclosure forward until the application is evaluated and any appeal is resolved. That is a meaningful protection for any homeowner who acts in time, and it is one of the strongest reasons to start the application earlier rather than later.
Federal servicing rules apply uniformly, and every borrower in every state gets the same 120-day pre-foreclosure window and the same right to apply for loss mitigation. After that, state law takes over, and state law varies enormously. The variations that matter most to a homeowner trying to choose between a short sale and a foreclosure are: whether the state requires judicial foreclosure, whether the state allows or restricts deficiency judgments, whether the state has a redemption right after sale, and whether the state has any specific consumer-protection statute on short sales.
Judicial-foreclosure states include Florida, Illinois, New York, Ohio, New Jersey, and Pennsylvania, among others. Non-judicial-foreclosure states include California (which uses a hybrid approach in practice), Texas, Georgia, Virginia, Tennessee, and Washington. Some states allow either, with the lender's choice driven by the documents the borrower signed.
Anti-deficiency protections are state-specific. California's set is among the strongest, blocking deficiency judgments on purchase-money loans secured by owner-occupied residences and limiting deficiency on short sales of owner-occupied properties. Arizona and North Carolina also have meaningful anti-deficiency rules. Other states allow deficiency judgments with limits. Borrowers in any state should ask a real-estate attorney about local protections before signing anything.
Redemption rights are similarly varied. Alabama and Michigan are examples of states that give the borrower a post-sale window to repurchase. Most non-judicial-foreclosure states do not.
For homeowners, the practical lesson is that the same set of facts can produce two very different outcomes in two different states. A homeowner in California who shorts their primary residence is in a meaningfully different position from a homeowner in Texas with the same loan and the same hardship. Local legal advice is not optional in this decision. It is the decision. AmeriSave originates in most U.S. states and the loss mitigation conversation always factors in the borrower's state of residence, but local counsel is still the right professional to confirm the specifics of any deficiency or redemption question.
End of one mortgage is not the end of the story. Most homeowners who go through a short sale or a foreclosure do buy again. The waiting periods detailed in Section 4 above are the minimums; what makes the difference between a borrower who qualifies the day the waiting period ends and a borrower who waits longer is what happens during the wait.
During the waiting period, the most important thing a borrower can do is rebuild credit. That means paying every other obligation on time, keeping credit-card utilization low, avoiding new collections, and saving the down payment that the new program will require. A borrower who comes out of the waiting period with a 720 credit score, three years of clean payment history, and a documented down payment is in a very different position from a borrower who comes out with the minimum waiting period satisfied and nothing else changed. AmeriSave's prequalification process is designed to evaluate exactly that kind of file — credit history rebuilt, savings documented, debt-to-income tightened — and to give the borrower a realistic read on what is achievable.
At AmeriSave, we work with a lot of borrowers during this rebuild period. Many of them come back through the door three or four years later and qualify for a competitive rate on a new mortgage. The waiting period is real, but it is not a permanent disqualification.
Choosing between a short sale and a foreclosure is not really a choice between two equal options. It is usually a choice between one option that the borrower can still influence and one that is happening to them. That said, the path that fits depends on the situation.
A short sale tends to be the right call when the borrower has a documented hardship, has equity that is underwater (the loan balance exceeds the home value), wants to preserve the option of buying again on a shorter timeline, and is willing to put in the time on documentation and listing. A short sale also tends to fit when the property is in a state with strong anti-deficiency protections on short sales, where the legal exposure on the gap is manageable.
A foreclosure tends to be the result, rather than the choice, when the borrower has been through loss mitigation and was either denied or did not engage, when the timeline has run out, or when the borrower has decided that the credit damage and the legal exposure are acceptable given the alternative. In some cases — particularly when the property is in a non-recourse state with strong borrower protections, when the borrower has no plans to buy again soon, and when the home has no realistic short-sale buyer — foreclosure may actually be the cleaner exit. That is the exception, not the rule.
Neither option is something to walk into without legal and tax advice. Real-estate attorneys, HUD-approved housing counselors, and CPAs are the three professionals every distressed homeowner should talk to before signing anything. The cost of those conversations is small compared to the cost of getting the deficiency, the tax exposure, or the waiting period wrong. AmeriSave can advise on the loan side and on what loss mitigation the servicer is required to evaluate, but the legal and tax advice should always come from licensed professionals in those fields.
It depends on the borrower's full situation. Short sales and foreclosures are not interchangeable terms, and the right path depends on a specific set of variables: state law, the type of loan, the borrower's other finances, the size of the deficiency, and what the homeowner wants the next chapter to look like. They differ in who initiates the process, how long it takes, how much the credit takes, how soon the borrower can buy again, what the tax exposure is, whether the lender can collect the gap, what shows up on the public record, and how much control the homeowner keeps along the way.
For a homeowner facing distress, the play is to call the loan servicer early — before two missed payments turn into four, before a notice of default arrives, while there are still options on the table. The CFPB rules that protect borrowers in loss mitigation only protect a borrower who applies. AmeriSave's loss mitigation team works with borrowers in distress every day, and the conversations that go best are the ones that start before the lender has been forced into the formal process. If you are not in default yet but can see it coming, that is the moment to ask the questions, not the moment to wait. Every borrower situation is different, and the answers come out of the questions.
No, a foreclosure is noted on a credit file with a unique "foreclosure" or "foreclosed account" number that is directly accessed by potential lenders. The terms "settled for less than the full balance" or "paid in full for less than full balance" are frequently used when reporting a short sale as a settled account. According to the Fair Credit Reporting Act, both report for seven years following the date of the initial delinquency that preceded the incident. The impact on the score varies. According to FICO data, a short sale usually decreases a score by between 50 to 150 points, with starting score being the largest variable, whereas a foreclosure can drop a score by about 85 to 160 points.
Not all the time. A short sale request from a borrower who is current but can provide proof of an impending hardship, such as a confirmed job loss with a future end date, a permanent disability, or a divorce decree ending a dual-income household, will be considered by some lenders only if the borrower is delinquent. Delinquent borrowers are subject to the Consumer Financial Protection Bureau's loss mitigation regulations; current borrowers are subject to the lender's own policy regarding the review of short sale requests. In any case, the hardship letter is the most crucial component of the application.
The state and the particular documents signed at the short sale closing or following the foreclosure auction will determine this. The short sale agreement specifies the defective conclusion in a short sale. Lenders have three options: they can release the borrower in full, settle the shortfall for a reduced sum on a promissory note, or keep the right to pursue the gap at a later time. State statutes control deficiency rules in a foreclosure. While some jurisdictions permit deficiency judgments with restrictions, others completely prohibit them on purchase-money loans for main properties. For a particular loan, a real estate lawyer in the state where the property is situated can provide a specific response.
The lending program determines speed. The typical waiting period for conventional loans through Fannie Mae and Freddie Mac is three years following a short sale and seven years following a foreclosure. Although FHA may allow a shorter timetable for short-sale borrowers who were current at the time of sale, HUD-managed FHA programs typically need three years following either event. Both incidents are subject to a two-year waiting period for VA loans. Three years following a foreclosure is often required for USDA programs. The standard waiting periods can be shortened by recording exceptional circumstances, but the minimum is two years.
When a lender cancels debt of $600 or more, it must provide Form 1099-C to the IRS. The borrower and the IRS both receive the form. In the year following the transaction's closing, anyone who has experienced a short sale or a foreclosure in which the lender canceled the deficit should anticipate receiving a 1099-C. The qualified principal residence indebtedness exclusion (if applicable for that tax year) and the IRC Section 108 insolvency exclusion (a permanent provision that applies to the extent the borrower's liabilities exceeded assets immediately prior to the cancellation) are two exclusions that may apply to the cancelled amount, which is normally treated as taxable income. Both exemptions are explained in IRS Publication 4681, and a CPA or registered agent may use them in a particular circumstance.
Indeed. Like any regular sale, the homeowner remains in the house during the listing time and the closing in a short sale. Maintaining the property in show condition and assisting the listing agent are the homeowner's responsibilities. The homeowner in a foreclosure may normally remain in the property until the date of the auction and, depending on state legislation, for a while after the sale. The new owner can then start the eviction process.
Request an evaluation for loss reduction by calling the loan servicer. Before arranging a foreclosure auction, the servicer is required by federal regulations to assess a complete application and provide all available choices, including loan modification, forbearance, repayment plan, deed in lieu, and short sale. Building the application and negotiating with the servicer can be done for free by a housing counselor who has been approved by HUD. Write down the hardship, collect the financial documents the servicer will ask for, and make the inquiries as soon as possible. Borrowers who initiate the dialog early, provide paperwork, and fulfill all of the servicer's requests are nearly invariably the ones that achieve the best results.
Fact Checked
