Some Highlights:
#1) WILL MY CREDIT SCORE DROP LESS IF DO A SHORT SALE INSTEAD OF A FORECLOSURE?
The short answer is "don't count on it." No one can answer this question for you correctly and that is because every case is different.
#2) WILL I BE ABLE TO BUY ANOTHER HOME QUICKER IF I DO A SHORT SALE INSTEAD OF A FORECLOSURE?
Once again, chances are no. Keep in mind, lenders make mortgage loans based on your ability and willingness to repay the loan. We determine this based, primarily, on your past credit history. Especially your past mortgage history.
#3) IS IT TRUE I AM NOT RESPONSIBLE FOR DEBT FORGIVENESS IN A SHORT SALE BECAUSE OF THE NEW MORTGAGE FORGIVENESS DEBT RELIEF ACT OF 2007?
First let say, IN BOLD, I am not a tax professional. It's of the utmost important that you seek the advice of a tax professional before proceeding with a short sale or foreclosure.
The Mortgage Forgiveness Debt Relief Act of 2007 was primarily started so that people, who were upside down in their homes, could refinance their home using an FHA loan and then the second mortgage holder would write off some of their loan to enable this. This kind of loan hasn't caught on because most lenders didn't go for it.
...The bottom line here is before you do this, meet with your accountant to discuss the ramifications. There are too many possibilities to go over here.
If you get a 1099-C form in the mail, after a short sale that looks like this, http://www.irs.gov/pub/irs-pdf/f1099c.pdf, you need to head to your accountant immediately.
#4) BASED ON ALL OF THIS, WHY WOULDN'T I JUST LET MY HOME GO INTO FORECLOSURE?
For one, because you are giving the lender a chance to recoup some of their money. It is far cheaper for a lender to negotiate a short sale with you and your buyer than it is to rack up attorney fees and other costs in a foreclosure.
Foreclosure can take eight months to a year and in a declining market, your decision could cost them $100,000's more than a short sale.
The next reason is because some believe, as we discussed earlier, it may be easier to rebuild your credit after the process. Your credit will likely be destroyed either way, but the road back to a respectable credit score may be shorter in a short sale, according to many experts.
Finally, and probably the top reason for a short sale, is depending on what kind of loan you have, and in what state, the lender may be able to go after you personally for a deficiency judgment at a later date. In Nevada, where I live, lenders have three months after the sale to try and obtain a deficiency judgment.
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