Unfortunately in today’s economic environment too many homeowners are being faced with the potential of losing their home to foreclosure. It is important to know, that if working with the bank to remedy the situation fails, foreclosure is not your only option. In many cases, a short sale may be your best choice. In a short sale, the homeowner and the bank agree that the homeowner sells the mortgaged property for less than the outstanding balance of the loan, and then turns over the proceeds of the sale to the lender with the understanding that the proceeds will fully satisfy the debt owed the bank.

So, when faced with this situation, is it better to allow the bank to foreclose on a homeowner’s property or should the homeowner consider a short sale?

With a foreclosure many experts agree that a homeowner will typically have a significantly larger negative impact on their credit score than with a short sale. This is usually on top of the decline in their score that has already taken place because of missed or late payments. In addition, the homeowner has no control over how the foreclosure is reported on your credit report. And, there is a possibility that the amount of forgiven debt will be reported as income to the IRS.

With a short sale, however, if the homeowner can qualify and prove a financial hardship, the homeowner has an opportunity to negotiate the sale price of their home, how the short sale is reported on their credit report, and typically the forgiven debt is not reported to the IRS as a collectable balance. The bottom line is most experts believe that a short sale is almost always a better option. So, if you know that you will be faced with falling significantly behind on your mortgage payments, don’t let months go by and wait for the bank to foreclose. Be proactive and begin the short sale process as soon as possible. In a few years, you will be happy you did.