What is the advantage of doing a Short Sale after a Bankruptcy?

It’s true that the Bankruptcy (Ch 7) will already hurt a borrower's credit score to a significant degree and that a Discharge in the Bankruptcy will prevent the lender from seeking a deficiency from the borrower (how much is owed more than how much the home sells for in foreclosure), which are the 2 main advantages of a Short Sale (less credit impact and also avoiding a deficiency). Yet, the advantage of a Short Sale after a Bankruptcy is that on a future Uniform Residential Loan Application, Fannie Mae Form 1003 (when seeking a mortgage for a future home), there are 2 "Yes No" questions that state as follows (and require additional details for a Yes answer):

"c. Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?"

"e. Have you directly or indirectly been obligated on any loan which resulted in foreclosure, transfer of title in lieu of foreclosure, or judgment?"

Therefore, a Short Sale can avoid being Red Flagged pursuant to either of these questions and it can avoid the hassle of attempting to get a future loan. Please note that there is also a question about Bankruptcy in the last 7 years (question “b.”), but question “e.” above survives for the lifetime of the applicant. Therefore, Bankruptcy will only be an issue on applications for 7 years, while a foreclosure is an issue forever.

Remember that closings must occur before July 1, 2010 to receive up to $8,000 in tax credit, so the clock is ticking.

I was at a wedding this weekend and a friend (who used a different attorney for the closing) was asking me about the credit because he has not received a commitment from the bank to date and he was getting very worried that he would miss the deadline. The fact is that he has time. Usually closings happen within a week of receiving a commitment and usually the commitment is the last step in being clear to close. Therefore, he should only start panicking during the week of June 21, 2010 if he has not yet received his commitment.

A great source for information about the first time homebuyer tax credit can be found by clicking here.

There you will learn about the necessary tax filing to receive the credit, inclusive of the need to file a paper return and attach Form 5405 and new homebuyers must attach a copy of a properly executed settlement statement used to complete such purchase. If the home is newly constructed, where a settlement statement is not available, the purchaser must attach a copy of the certificate of occupancy showing the owner’s name, property address and date of the certificate. Purchasers of mobile homes who are unable to get a settlement statement must attach a copy of the executed retail sales contract showing all parties' names and signatures, property address, purchase price and date of purchase.

Good luck and go get that credit.

I just finished 2 foreclosure defense consults and picked up a newspaper only to read exactly what I had just advised. You can stay in your home. No, the sheriff is not showing up tomorrow. You have time. My point is that if they banks start to learn how expensive foreclosure is by way of court / attorneys costs, the time value of their money that we are locking up, the depreciation in the value of the home, and the transactional costs of eventually selling a home they didn't want in the first place, maybe, just maybe they will learn that a modification is in their best interest.

To read a reassuring New York Times article on the topic, click here.