Foreclosure vs Short Sale

Side by Side Comparison

CONCERN FORECLOSURE SUCCESSFUL SHORT SALE
Future loans backed by Fannie Mae Primary Residence1 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 after only 2 years.
Future Fannie Mae-backed Loans
Non primary residence2
An investor who allows a property to got into 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 mortgage application, a prospective borrower will have to answer “YES” to question C in Section VIII of the standard 1003 form that asks, “Have you had a 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 before executing a short sale, a homeowner may apply for an FHA loan immediately. If homeowner is late before short sale execution, will be eligible for FHA loan after 3 years.3
Credit Score Score may be lowered anywhere from 250 to more than 300 points. Typically will affect a credit score for 3 years. Only late payments on mortgage will show, and after sale, mortgage is normally reported as a code 13 “Paid as for Less than 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 breif as 12 to 18 months.
Credit History Foreclosure will remain as a public record permanently, and 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 item for “short sale.” The loan is typically reported “paid in full, settled for less than agreed.”
Security Clearance Foreclosure is the most challenging issue against a security clearance outside a serious misdemeanor or felony conviction. 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. On its own, a short sale does not challenge most security clearances.4
Current Employment Employers have the right and are actively checking in the credit of all employees who are in sensitive positions. In many cases, a foreclosure is a reason to immediate reassignment or termination. A short sale is not reported on a credit report. 5
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 an in most cases will challenge employment. A short sale is not reported on a credit report.6
Deficiency Judgment, Nevada In 100% of foreclosure cases (whether through judicial or non-judicial proceedings) the bank has the right to pursue a deficiency judgment. On a short sale, it is possible to appeal and convince the lender to give up the right to pursue a deficiency judgement 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 could 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.

SOURCES:
1 Fannie Mae Announcement 08-16: Michael A. Quinn, Senior Vice President, Single-Family Risk Officer
2 Fannie Mae Announcement 08-16: Michael A. Quinn, Senior Vice President, Single-Family Risk Officer
3 Mortgagee Letter 09-52, 4155.1 Chapter 4.C.2. Short Sales
4,5,6 Short sales are currently not explicitly reported on a credit report