Short Sale vs Foreclosure
What it is: This happens when homeowners intentionally stop paying their mortgage and are foreclosed upon even when they can afford the payments.
Why they do it: Strategic Defaulters believe that when they are foreclosed on they are relieved of an asset that is worth less than what they paid for it.
Why there’s nothing strategic about “Strategic Default”: the damage to credit takes a long time to repair and when the Mortgage Forgiveness Debt Relief Act is expired, the debt that the borrowers walked away from will count as income that they will have to pay taxes on.
Short Sale vs. Foreclosure Consequences
|ISSUE||FORECLOSURE||SUCCESSFUL SHORT SALE|
|Future Fannie Mae Loan (Primary Residence)||A homeowner who loses a home to foreclosure is ineligible for a Fannie Mae-backed mortgage for a period up to 7 years with some exceptions based on extenuating circumstances. See: efanniemae.com||A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae-backed mortgage within 2 years (see page 2 for LTV ratios).|
|Future Fannie Mae Loan (Non Primary)||An investor who loses a home to foreclosure is ineligible for a Fannie Mae—backed mortgage for a period up to 7 years with some exceptions based on extenuating circumstances. See: efanniemae.com||An investor who successfully negotiates and closes a short sale will be eligible for a Fannie Mae-backed investment mortgage within 2 years (see page two for LTV ratios).|
|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 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.|
|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 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.|
|Credit History||Foreclosure will remain as a public record on a person’s credit history for 7 years or more.||A short sale is not reported on a person’s 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.”|
|Security Clearances||Foreclosure is the most cchallenging issue against a security clearance outside of a conviction of a seriousmisdemeanor or felony. If a client has a foreclosure and is a police or security officer, in the military, in the CIA, or any other position that requires a security clearance, in almost all cases clearance will be revoked and position will be terminated.||On its own, a short sale does not challenge most security clearances.4|
|Current Employment||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.||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.6|
|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 pursue 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.|
If you or someone you know is in danger of losing their home to foreclosure,Contact Me Today!
|Credit||Only late payments on the mortgage will show, and after sale, mortgage is normally reported as “paid as agreed,” “paid as negotiated” or “settled.” This can lower a credit score as little as 50 points if all other payments are being made.||Score may be lowered anywhere from 250 to over 300 points. Typically will affect score for over 3 years.|
|Ability to purchase home in future||In as little as 2 years for most loan types.||Typically 7 year wait period.|
|Ability to get a job in the future||A short sale is not reported on a credit report and is therefore not a challenge to employment.||Employers may have the right and are actively checking the credit regularly of all employees who are in sensitive positions. A foreclosure in many cases may be ground for immediate reassignment or termination.|
|Deficiency Judgment||In HAFA and HAFA II programs, deficiency must be waived. In other programs, a deficiency can usually be negotiated and waived.||In a foreclosure, the lender has the ability to retain the right to the amount owed for years to come.|
Fannie Mae Waiting Period Table
|Derogatory Event||Fannie Mae Waiting Period Requirements||Waiting Period with Extenuating Circumstances|
|Foreclosure||7 Years||3 Years• Additional requirements after 3years up to 7 years
• 90% maximum LTV ratios
• Purchase, principal residence
|Short Sale||2 Years – 80% maximum LTV ratios4 Years – 90% maximum LTV ratios7 Years – LTV ratios per the Lender
|2 Years – 90% maximum LTV ratios|