Foreclosure vs. Short Sale

Issue: Future Fannie Mae Loan For A Primary Residence

Foreclosure: A homeowner who loses a Foreclosure is ineligible for a Fannie Mae backed mortgage for a period of five years.

Successful Short Sale: A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae-backed mortgage after only 2 years.

Issue: Future Loan with any Mortgage Company

Foreclosure: On any future 1003 application, a prospective borrower will have to answer YES to question C in Section VIII of the standard 1003 that asks “Have you had property foreclosed upon or given title or deed-in-lieu thereof in the last 7 years?” This will affect future rates.

Successful Short Sale: There is no similar declaration or question regarding a short sale. FHA – If current at the close of short sale, a homeowner may apply for an FHA loan immediately. If homeowner is late before close of short sale closing, will be eligible for FHA loan after 3 years.

Issue: Credit Score

Foreclosure: Score may be lowered anywhere from 250 to over 300 points. Typically will affect score for over 3 years.

Successful Short Sale: Only late payments on mortgage will show, and after sale, mortgage is normally reported as “paid as agreed,” “paid as negotiated,” or “settled.” This can lower the score as little as 50 points if all other payments are being made. A short sale’s effect can be as brief as 12 to 18 months.

Issue: Credit History

Foreclosure: Foreclosure will remain as a public record on a person’s credit history for 7 years or more.

Successful Short Sale: A Short Sale is not reported on a persons credit history. There is no specific reporting item for “short sale.” In most cases a loan is typically reported “paid in full, settled” or “paid as negotiated.”

Issue: Security Clearances

Foreclosure: Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. If a client has a foreclosure and is a police officer, in the military, in the CIA, Security, or any other position that requires a security clearance in almost all cases clearance will be revoked and position will be terminated.

Successful Short Sale: On its own, a short sale does not challenge most security clearances.

Issue: Current Employment

Foreclosure: Employers have the right and are actively checking the credit regularly of all employees who are in sensitive positions. A foreclosure in many cases is ground for immediate reassignment or termination.

Successful Short Sale: A short sale is not reported on a credit report and is therefore not a challenge to employment.

Issue: Future Employment

Foreclosure: Many employers are requiring credit checks on all job applicants. A foreclosure is one of the most detrimental credit items an applicant can have and in most cases will challenge employment.

Successful Short Sale: A short sale is not reported on a credit report and is therefore not a challenge to employment.

Issue: Deficiency Judgment

Foreclosure: In 100% of foreclosures (except in those states where there is no deficiency) the bank has the right to pursue a deficiency judgment.

Successful Short Sale: In some successful short sales it is possible to convince the lender to give up the right to pursuit a deficiency judgment against the homeowner.

Issue: Deficiency Judgment (amount)

Foreclosure: In a foreclosure the home will have to go through an REO process if it does not sell at auction. In most cases this will result in a lower sales price and longer time to sale in a declining market. This will result in a higher possible deficiency judgment.

Successful Short Sale: In a properly managed short sale the home is sold at a price that should be close to market value and in almost all cases will be better than an REO sale resulting in a lower deficiency.