California lenders are subject to 2 regulations tht work in favor of the borrower:

1. When pursuing any secured obligation like a home loan, they must collect from collateral first.
2. California has the One Action Rule, which one collecting a debt, you can only get one shot.

How does this help the borrower?  Most loans in California are secured with a Trust Deed which allows the lender to foreclosue on a house non-judicially, without going to court.  This route is much cheaper than foreclosure judicially, through the courts since the courts are slow and quite expensive.

In order for the lender to get a deficiency judgement, they have to go to court.

A short sale involves offering the home for sale via a MLS listing.  Potential home buyers will make appointments to view the home, some will try to make lowball offers, agents may hold open houses to get a buyer.

The basics:

Short sales will happen when a lender agrees to accept less than the amount owed against the home because there is not enough equity to sell or pay all the costs for the sale.  Not all lenders will negotiate a short sale, and that is why a real estate agent or lawayer can help you in contacting the lender’s loss mitigation department to find out.  It will be no surprise, that the lenders will look at other cash assets, the lender may want to tap into those accounts.

How is the seller’s credit affected?

Foreclosures or Deed-in-Lieu of foreclosure affect the credit the same.  Sellers will take a hit of 200 to 300 points, depending on overall condition of credit.  If the seller’s FICO score is 680, then it could dip as low as 380.

Short sales will show up on a credit card, just like a foreclosure.  The ding on credit will show up as pre-foreclosure status.  A short sale hit could be less, but it will still damage your credit.

Waiting Period to Buy another Home

Foreclosures or Deed-in-Lieu of Foreclosure may end up waiting for about 24 to 72 months before a lender will offer any kind of interest rate that will make sense.

Short sales can wait a shorter time.

Short Sale and Foreclosure Deficiency Judgment:

The bad news is a seller could be subject to a deficiency judgment for the difference between the loan amount and the amount paid.  In California, purchase money  loans are not subject to deficiency judgments; however, hard money loans, equity loans and refinances are.

If you are a seller trying to decide whether to let a home go through foreclosure versus attempting a short sale, salvaging your credit may not be an advantage to doing a short sale.  The big advantage is that you’ll be able to buy a home sooner via a short sale versus foreclosures.  But you should seek legal and tax advice before making that decision.