FORECLOSURE vs. SHORT SALE - HOMEOWNER CONSEQUENCES

ISSUEFORCLOSURESUCCESSFUL SHORT SALE

Future Fannie Mae Loan - Primary Residence

(effective May 21st, 2008)

A homeowner who loses a home to Foreclosure is ineligible for a Fannie Mae backed mortgage for a period of 5 yearsA homeowner who successfully negotiates, and closes a Short Sale will be eligible for a Fannie Mae backed mortgage after only 2 years
Future Fannie Mae Loan - Non PrimaryAn Investor who allows a property to go into Foreclosure is ineligible for a Fannie Mae backed investment mortgage for a period of 7 yearsAn 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 CompanyOn 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 ScoreScore 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 HistoryForeclosure will remain as a public record on a person's credit history for 10 years or more.Short Sale is not reported on a credit "paid in full, settled."
 Current EmploymentEmployers have the right and are actively checking the credit regularly of all employees who are in sensitive positions. A Foreclosure may be grounds for immediate reassignment or termination. A Short Sale is not reported on a credit report and is therefore not a challenge to employment.
Future EmploymentMany 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 JudgementIn many states, depending on the kind of loan, the bank has the right to pursue a deficiency judgement.Depending on the type of loan some lenders who accept a Short Sale may be able to pursue a borrower for a deficiency judgement.  In many successful Short Sales it is possible to convince the lender to give up this right as part of the Short Sale.
Deficiency Judgement (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 sell in a declining market.  This will result in a higher possible deficiency judgement.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.
 Information is deemed correct but not guaranteed. Basic source material provided by Distressed Property Institute, LLC. Always contact your tax advisor.