Let’s say you are planning on filing bankruptcy and you own a home but you have stopped making the mortgage payments. You know you are going to lose the house eventually. But in the meantime, you are living rent-free.
If you do a short sale you will need to move out when the sale closes. You will no longer be living rent-free. But you are concerned that your credit will be more damaged by a foreclosure plus a bankruptcy than by the bankruptcy alone.
Most bankruptcy attorneys will tell you to just live in the property rent-free for as long as you can. They will tell you not to do a short sale. But most real estate brokers will advise you to do a short sale.
It is true that many lenders will view you less favorably if you have had a foreclosure as opposed to a short sale even if you have filed for bankruptcy.
Fannie Mae has guidelines concerning the issue. Essentially, the guidelines say that the bank makes you wait certain amounts of time after a negative event such as a bankruptcy or foreclosure in order to get a new home loan.
When I write this the amounts of time were as follows:
After a Chapter 7 Bankruptcy: 4 years
After a Chapter 13 Bankruptcy: 2 years from discharge date, 4 years from dismissal date
After a Foreclosure: 7 years
After a Deed in Lieu of Foreclosure or Short Sale: This depends on the loan to value ratio with respect to the purchase. If the loan to value ratio is 80% you must wait 2 years. If the loan to value ratio is 90% you must wait 4 years.
There are provisions that say that if there are “extenuating circumstances” the waits can be shorter.
Therefore it appears that if you wish to purchase a home a few years after losing or giving up your home, a short sale or a deed in lieu of foreclosure may be a very good idea. However, if you do not wish to purchase a different home after losing your current home it would seem to make more sense to live in it rent-free for as long as you can and wait for the foreclosure.
There is another factor that may lead you to do a short sale. So long as you remain the owner of the property, post-bankruptcy filing HOA fees will accrue. The only way to stop these post filing HOA fees from accruing is to get the property out of your name. A short sale is a way to do that.