Foreclosure vs. Short Sale

There is a lot of discussion these days about Short Sales and Foreclosures. I think it might be helpful to understand some of the terminology and how each option might impact an owner of a property who is in jeopardy of losing their home. Here's a quick and simple definition of the two and some additional information that helps understand the impact of Foreclosure vs. Short Sale. If you have any questions or would like additional information, please call me.

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When a homeowner defaults by failing to make payments on his or her mortgage, the bank or financial institution that holds the mortgage note may foreclose on the property. Foreclosure gives the legal ownership of a property to the bank to allow the bank to recoup its investment. Foreclosure proceedings vary by state but usually involve court appearances to ensure the foreclosure is warranted.

Real Estate Short Sale Definition:
A short sale means that you sell the property. But you get a lower price than what you owe. Then you go to your lender (or both lenders if you have two loans) and get them to approve the sale of your house.

The purpose of a real estate short sale is to avoid expensive foreclosure for the lender and get the borrower out of debt with the least possible credit history damage. Lenders have no interest in owning property as they have to pay property taxes and pay for necessary repairs and borrowers would be happy to walk out free of mortgage debt.

However, lenders may or may not agree to take the short sale as full debt satisfaction. As a result, they could file a deficiency judgment for the remaining loan amount and the borrower's credit and capability of taking another home loan soon after the short sale will be damaged.

Foreclosure vs. Short Sale
Homeowner Consequences



Successful Short Sale

Future Fannie May Loan – Primary Residence

A homeowner who loses his home to foreclosure is ineligible for a Fannie May Backed mortgage for a period of 5 years.

A homeowner who successfully negotiates and closes a Short Sale will be eligible for a Fannie May backed mortgage after only 2 years.

Future Fannie May Loan – Non Primary

An investor who allows a property to go to foreclosure is ineligible for a Fannie May backed investment mortgage for a period of 7 years.

A homeowner who successfully negotiates and closes a Short Sale will be eligible for a Fannie May 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 VII 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 is no similar declaration or question regarding a Short Sale.

Credit Score

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

Only late payments on a 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 public on a person’s credit history for 10 years or more.

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

Security Clearances

Foreclosure is the most challenging issue against a security clearance outside a conviction of a serious misdemeanor or felony. If a client has a Foreclosure and is a police officer, in the military, CIA, or any other position that requires a security clearance in most cases clearance will be revoked and the 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 checking the credit of all employees who are in sensitive positions. A Foreclosure may be grounds for an immediate reassignment or termination.

A Short Sale is not reported on a credit report and is 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 can challenge employment.

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

Deficiency Judgment

In many states, depending on the kind of loan, the bank has the right to pursue a deficiency judgment under the personal covenant on the loan.

Depending on the type of loan some lenders who accept a Short Sale may be able to pursue a borrower for a deficiency judgment. In many successful Short Sales it is possible to convince a lender to give up this right as part of the Short Sale.

1 comment:

Brenda said...

Thanks for the info. on your blog. I enjoy getting tips!
Brenda Whipple