Foreclosure compared to Successful Short Sale

Credit Score

Foreclosures are a public record similar to a bankruptcy and usually can affect your credit score by lowering it 175 to 300 points. As a public record it will stay there for 7to 10 years.

Short sales do not show up under public records and once the short sale is completed successfully, all that will show on your credit will be the late payments to the mortgage and the statement “settled for less than full amount due” (or similar verbiage). Depending on the rest of your credit, the score may only be affected by as little as 50 to 60 points.

Credit History
Along with the late payments, the foreclosure will remain as a public record your credit history for 7 to 10 years.
Only the late payments will be reported on your credit.

The short sale will appear the same as a charge off on a credit card and will be reported as “settled for less than full amount due” (or similar verbiage)…this may be changing, for the positive, in the near future.

Future Home Purchase (Primary Residence – Fannie Mae Loan) (effective May 21, 2008)
Per Fannie Mae, individuals losing a home to foreclosure will not be eligible for a Fannie Mae loan for a time period of 5 years.
Per Fannie Mae, if an individual completes a short sale they will be able to purchase a home after 2 years (depending on credit score and how they have maintained the rest of their credit)

Future Home Purchase (Non Primary Residence – Fannie Mae Loan) (effective May 21, 2008)
If an individual loses an investment property to foreclosure they can not buy another investment property for 7 years under current Fannie Mae guidelines.  Per Fannie Mae, if an individual completes a short sale they will be able to purchase a home after 2 years under current Fannie Mae guidelines. **

Future Loan with any Mortgage Company
When completing a loan application in the future for a purchase of a home the borrower will have to answer YES to the question (C, section VIII) “have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?” For those 7 years the type of loan or rate you receive may be affected by this.

There is currently no question related to short sales currently on a loan application. **

Deficiency Rights
Depending on the type of loan, in a foreclosure, the lender can pursue you for all of the deficiency. (Consult an attorney for current and state-specific laws)
As part of the negotiation process,you may be able to have the lender agree to release you for any future deficiency.

Amount of the Deficiency Judgment
In a foreclosure, the final sales price is lower than in a short sale and the fees involved for the bank are higher. If the lender does have deficiency rights, this can result in a higher amount that they will be able to pursue.

The sales price in a short sale is typically at market value or just below. In most cases, the amount of the deficiency is smaller than in a foreclosure, which would result in a smaller amount that the lender could pursue if a deficiency judgment was not waived as part of the short sale negotiation process.

Current Employment
Employers have the right to check the credit of all employees who are in sensitive positions. In some positions, a foreclosure may be grounds for reassignment or termination.

A short sale is not a public record and is reported separately on a credit report. The employer will only see late payments and an account that has been settled. This shows that you worked with the lender towards a resolution and typically looks much better to the employer.

Future Employment
Most employers check credit histories of future employees and some (depending on the sensitivity of the position) will not allow for a foreclosure on a future employees record. If an individual is currently employed in a position requiring a security clearance, sometimes it could mean grounds for reassignment of termination.

The short sale will not show as a “public record”, it will only show on the credit as late payments and “settled for less than full balance” (or something similar). This shows to the employer that the future or current employee worked with the lender towards a resolution and typically looks much better to the employer. A short sale by itself does not challenge most security clearances.

 

**Want to see if it make financial sense to stay in your home even though you’re underwater? Go to our DoesItPayToStay calculator…it’s really an eye-opener.

** We are not tax experts/CPA’s or attorneys. The information provided is for informational purposes ONLY. It will serve in a starting point to further investigate how a short sale or foreclosure may effect you. We HIGHLY RECOMMEND that you consult a CPA/tax advisor and/or and attorney regarding your specific situation BEFORE you consider a short sale, deed-in-lieu-of-foreclosure or foreclosure.