A Short Sale Vs A Foreclosure – What’s the difference?

In short, a short sale is much less damaging to the seller than a foreclosure would be.  The table below summarizes exactly why that’s true.  It’s important to note though, that not everyone will qualify for a short sale.  Feel free to call if you have any questions or concerns regarding your own home, and what your options may be.

From the first time home buyer to the savvy investor – from the seller with equity to the seller underwater and needing options – I am here for you.

Issue

Foreclosure

Successful Short Sale

Future Fannie Mae Loan – Primary Residence (effective May 21, 2008) A homeowner who loses a home to Foreclosure is ineligible for a Fannie Mae backed mortgage for a period of 5 years. A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed mortgage only after 2 years.

Future Fannie Mae Loan – Non Primary (effective May 21, 2008)

 

An Investor who allows a property to go to Foreclosure is ineligible for a Fannie Mae backed investment mortgage for a period of 7 years. An investor who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed investment mortgage after only 2 years.

Future Loan with any Mortgage Company

 

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.

There are no similar declarations or question regarding a short sale.

Credit Score

 

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

 

 

Only late payments on mortgage will show and after sale mortgage will be reported as paid or negotiated. This will 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.

Credit History

 

Foreclosure will remain as a public record on a person’s credit history for 10 years or more.

 

A Short sale is not reported on a credit history. There is no specific reporting item for “short sale” The loan is typically reported “paid in full, settled”.

Security Clearances

 

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.

A Short Sale on its own does not challenge most security clearances.

 

Current Employment

 

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

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

 

Future Employment

 

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.

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

 

Deficiency Judgment

 

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

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

Deficiency Judgment (amount)

 

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.

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.

Issue Foreclosure Successful Short Sale
Future Fannie Mae Loan – Primary Residence (effective May 21, 2008) A homeowner who loses a home to Foreclosure is ineligible for a Fannie Mae backed mortgage for a period of 5 years. A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed mortgage only after 2 years.

Future Fannie Mae Loan – Non Primary (effective May 21, 2008)

 

An Investor who allows a property to go to Foreclosure is ineligible for a Fannie Mae backed investment mortgage for a period of 7 years. An investor who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed investment mortgage after only 2 years.

Future Loan with any Mortgage Company

 

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.

There are no similar declarations or question regarding a short sale.

 

Credit Score

 

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

 

 

Only late payments on mortgage will show and after sale mortgage will be reported as paid or negotiated. This will lower the score as little as 50 points if all other payments are being made. A short sale’s effect can be a brief as 12 to 18 months.

Credit History

 

Foreclosure will remain as a public record on a person’s credit history for 10 years or more.

 

A Short sale is not reported on a credit history. There is no specific reporting item for “short sale” The loan is typically reported “paid in full, settled”.

Security Clearances

 

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.

A Short Sale on its own does not challenge most security clearances.

 

Current Employment

 

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

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

 

Future Employment

 

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.

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

 

Deficiency Judgment

 

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

 

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.

Deficiency Judgment (amount)

 

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.

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.

 

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