The damage to neighborhoods due to foreclosure and short selling cannot be understated. Original homeowners, who cared for their homes, may be replaced by renters moving in on a temporary basis (which may or may not be a bad thing, depending on that person’s personality) though the biggest problem is obviously when homes stand vacant for extended periods of time. Banks, flooded with such problem houses, want to have them off their books as quickly as possible, and so will price the home far below actual value, thus devaluing the entire community. At the same time, though, they cannot possibly afford the upkeep on so many dwellings that remain unoccupied.
Often, it is the cosmetic issues that make a house continue to lose value even after the bank has priced it low. Will you start trimming the neighborhood lawn to keep up appearances (and prices?). Say you’re in that position. What do you do? You’re surrounded by foreclosed and short-sold or selling properties, and your home is worth less than half what you paid for it. You can’t get a home equity loan because you’re so deep in negative equity that it’s unlikely that even a stabilized housing market would bring you to even breaking even. Suppose the wolves are at the door. What do you do?
Whatever you do, now’s not the time to panic, though you might well feel that tightening in your throat as the day looms nearer when your family could lose everything. The trick, then, is to protect what you’ve got, and plan for the future. Short selling and foreclosing are two very different animals, and they impact your credit and your future ability to buy a home in very different ways. Without doubt, foreclosing is the worse of the two options. There are numerous side effects that go along with the process. You can look forward to an extended period of time in which you likely won’t be able to buy another home of your own, your credit cards may go to their default rates, and you may even end up owing the IRS for the unpaid amount of your mortgage.
On the other hand, short selling is a much more savory option, poor though it might be. For instance, while short selling does have a severe negative impact on your credit rating, foreclosure affects your rating for much longer, and can bring your score down much lower. Secondly, taxes are again a factor, since the IRS views forgiven debt as taxable income. Even though you don’t own the property any more, and technically have no benefit from that money, they still call it income. Fortunately, though, if the short-sold home is your primary residence, you can file paperwork that can waive this taxation.
While neither option is very good, it does beat the alternative - losing everything all together. If you do have to go through it, though, plan ahead, be smart, and have realistic goals in place that will allow you to get back on your feet as quickly as possible.