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Foreclosure vs. Short Sale: What Should You Do?

Reblogger
Real Estate Broker/Owner with Broadpoint Properties Cal BRE #01324959

 

There is lots of controversy about whether a short sale or a foreclosure might be better for an individual homeowner who is having trouble making ends meet. Each person's situation is very unique, and it is always best to discuss your situation with an attorney before making any final decisions.

My colleague, Donna Bigda, wrote an interested blog post that reviews some of the main differences. Note that she is from Connecticut, and each state has different rules and regulations. Wherever you live, this is a good read!

 

Original content by Jamie Dumaine-Russell 0754296

There are many homeowners today without a clear understanding of the differences between a foreclosure and a short sale.  The consequences a homeowner faces between the two can have a huge impact on their credit and employment especially if their job requires a security clearance.

Foreclosure vs Short SaleForeclosure vs Short Sale

 

 

In an effort to help these homeowners who may not be aware of the advantages and disadvantages of foreclosure vs short sale, I would like to explain the points at issue and consequences of both.

 

 

 

In a foreclosure credit your credit score may be lowered from 250 to over 300 points and it typically can affect your score for over 3 years.

With a successful short sale on your home only late payments on a mortgage will show and after sale mortgage will be reported as paid or negotiated.  This will lower the credit score as little as 50 points if all other payments are being made.  The effect of a short sale can be as brief ans 12 to 18 months.

Your credit history in a foreclosure will remain as a public record for 10 years or more.  A short sale is not reported on your credit history as there is no specific reporting item for a "short sale."  The loan is typically reported "paid in full, settled."

Outside of a conviction of a serious misdemeanor or felony a foreclosure is the  most challenging issue against a security clearance.  If you are in the military, in the CIA, Security, are a police officer or any other position that requires a security clearance and have a foreclosure in almost all cases that clearance will be revoked and the position terminated.  A short sale on its own does not challenge most security clearances.

If you are currently employed employers have the right and are actively checking the credit regularly of all employees who are in sensitive positions.   In many cases a foreclosure is grounds for immediate reassignment or termination.  Since a short sale is not reported on a credit report it is as a result not a challenge to employment.

In the case of future employment many employers are requiring credit checks on all job applicants.  In most cases a foreclosure will challenge employment and is one of the most detrimental credit items an applicant can have.  As stated above because a short sale is not reported on a credit report as a result is not a challenge to employment.

A bank has the right to pursue a deficiency judgment in 100% of foreclosures (except in those states where there is no deficiency).  It is possible in some successful short sales to convince the lender to give up the right to pursuit a deficiency judgment against a homeowner.

In regards to deficiency judgment amounts a home in foreclosure will have to go through an REO process if it does not sell at auction and can in most instances result in a lower sales price and longer time to sell in a declining market.  This will result in a higher possible deficiency judgment.

When a short sale is properly managed a home is sold at a price that should be close to market value and in almost all instances will be better than an REO sale resulting in a lower deficiency.

The period for eligibility of a future loan differ greatly between a homeowner who loses a home to foreclosure and a homeowner who successfully negotiates and closes a short sale.

Effective May 21, 2008 the homeowner of a primary residence who loses a home to foreclosure is ineligible for a Fannie Mae backed mortgage for a period of 5 years.  With a successfully negotiated and closed short sale a homeowner will be eligible for a Fannie Mae backed mortgage after only 2 years.  In a non-primary residence an investor who allows a property to go to foreclosure is ineligible for a Fannie Mae backed investment mortgage for a period of 7 years.  In a successfully negotiated and closed short sale an investor will be eligible for a Fannie Mae backed investment after only 2 years.

Eligibility for a future loan with any mortgage company for a homeowner who  loses a home to foreclosure will affect their future rates and will require the prospective borrower to answer YES to question C in Section VII of the stand 1003 application that asks "Have you had property foreclosed upon or given title or deed in lie thereof in the last 7 years?"   There is no similar question or declaration regarding a short sale.

A short sale is an emotional transaction but as a Certified Distressed Property Expert, I want to help take the stress out of losing your home to foreclosure and explain the full range of solutions that are available.  Call me today for a confidential consultation. 

 

Donna Bigda
Licensed Connecticut REALTOR®
10 Pine Orchard Road
Branford, Connecticut 06405

Call Donna at 203-488-1641, ext. 214
Fax 203-315-2127

by email
Donna@DonnaBigda.com 
or visit
www.distressedhomeownershelpline.com

 

Certified Distressed Property Expert

Copyright © 2009 by Donna Bigda, All Rights Reserved ...*Foreclosure vs Short Sale*

Disclaimer:  All information provided by this author is strictly an opinion, is not guaranteed, may be based on information collected from several sources, which may or may not be deemed reliable at the time of researching this article and may be time sensitive.  Sellers are advised to obtain legal advice regarding the advisability and terms of any short sale agreement with creditor(s) and professional tax advice regarding tax implications of a sale.

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Comments (6)

Katerina Gasset
The Gasset Group & Get It Done For Me Virtual Services - Provo, UT
Amplify Your Real Estate & Life Dreams!

Melissa- Even a bankruptcy is better than a foreclosure on your record according to attorneys we discuss this with and according to mortgage lenders also. Foreclosure is not an option when we are doing a short sale! Katerina

Aug 26, 2009 02:06 PM
Jon Zolsky
FunCoast Realty 386-405-4408 - Ponce Inlet, FL
your Daytona Condo Agent

Melissa,

I missed this blog, and it is a very good synopsis of the factors affecting the homeowner in case of foreclosure and successful short sale.

Aug 26, 2009 02:13 PM
Nevin Williams
Fairway Independent Mortgage Corporation - Cary, NC
Senior Mortgage Advisor

Melissa - Your expertise provides a great service not only as an agent but as you pointed out assisting in saving someones credit and reputation.  This is good info and I hope a person in financial duress finds this blog post.

Aug 27, 2009 09:37 AM
Wendy Rulnick
Rulnick Realty, Inc. - Destin, FL
"It's Wendy... It's Sold!"

Melissa - Good points from Donna.  Some might be contested...  but short sale is better!

Aug 27, 2009 10:45 AM
Chris Ann Cleland
Long and Foster Real Estate - Gainesville, VA
Associate Broker, Bristow, VA

Melissa:  The foreclosures screwing with government clearances is really a HUGE deal in my suburban Washington, DC location.  I know a lot of potential short sellers are worried about their clearance with the short sale too, but I always direct them to their HR department.  What usually comes back is that, as long as there has been no financial mismanagement, the short sale is not an issue for clearances.

Aug 29, 2009 02:31 AM
Mary Douglas
United Country Ponderosa Realty, Red Feather Lakes, Colorado - Red Feather Lakes, CO
REALTOR, Red Feather Lakes, Colorado

Hi Melissa, this was a great Re-Blog, so many things to consider when facing a foreclosure or deciding on a short sale. 

Aug 29, 2009 03:40 AM