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Homeowners: Should you select Foreclosure versus Short Sale?

Reblogger Maria Mastrolonardo, IL Probate Specialist

Real Estate Agent with RE/MAX of Naperville & RE/MAX Enterprises

May 13, 2010 07:30 AM

Naperville Short Sale Sellers: Regina gives an excellent chart showing the different consequences between a Foreclosure vs. Short Sale for the Homeowner.

FORECLOSURE vs. SHORT SALE

Homeowner (Borrower) Consequences

Issue

Foreclosure

Successful Short Sale

Future Fannie Mae Loan (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 Loan (Non-Primary Residence²)

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.

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 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 property foreclosed upon or given title or deed in lieu thereof in the last 7 years?"
This affects future rates.

There is no similar declaration or question regarding a short sale.

Credit Score

Score may be lowered anywhere from 250 to more than 300 points. Typically affects a credit score for over 3 years.

Only late payments show; and after sale, mortgage typically reported ‘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 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 reporting item for ‘short sale'. The loan is typically reported ‘paid in full, settled'.

Security Clearance

Foreclosure is the most challenging issue against a security clearance (besides a felony conviction or serious misdemeanor). With a foreclosure on the record of a police officer, law enforcement, military servicemember, CIA employee, or any position requiring a security clearance, clearance will be revoked and position will be terminated (in almost all cases).

On its own, a short sale does not challenge most security clearances.³

Current Employment

Employers have the right and are actively checking the credit of all employees who are in sensitive positions. In many cases, a foreclosure is reason for immediate reassignment or termination. In some states, your real estate license (or other state licenses) may be revoked.

A short sale is not reported on a credit report and is therefore not a challenge to employment.⁴

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 future employment.⁵

Deficiency Judgment

In deficiency states, 100% of foreclosures the bank has the right to pursue a deficiency judgment. In non-deficiency states (such as CA), even after a foreclosure, a deficiency judgment may still be pursued by junior lienholders (2^nd and 3^rd trust deed holders); or by holders of non-recourse loans (such as a HELOC with a personal guarantee).

With a successful short sale negotiation, the lender can agree to give up the right to pursue a deficiency judgment against the homeowner.

Deficiency Judgment (amount)

In a foreclosure, the home will either sell at auction or the lender will take it back and sell it as an REO. This typically results in a lower sales price and longer sell-time in a declining market, which results in a higher possible deficiency judgment (in those states that allow such).

In successful short sale, the home is sold at a higher price than an auction or REO sale, resulting in a lower deficiency.



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 Short sales are currently not explicitly reported on a credit report.
⁴ Short sales are currently not explicitly reported on a credit report.
⁵ Short sales are currently not explicitly reported on a credit report.
Data source compliments of Distressed Property Institute, http://www.cdpe.com/distressed-property-institute.html

Regina P. Brown
CA Real Estate Broker
DRE # 00983670

Regina P. Brown
Broker, Realtor®, e-Pro
Join & post to my NEW ActiveRain group at http://activerain.com/groups/virtualoffice



Text copyright © 2010 R.P. Brown, All Rights Reserved

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Melissa Zavala

Broadpoint Properties - Escondido, CA

Broker, Escondido Real Estate, San Diego County

This is a helpful chart and it is definitely making the circle on the Internet!

May 21, 2010 03:00 AM

Billie Hillier

http://702IsHome.com - North Las Vegas, NV

Savvy Home Realty Solutions

great chart - easy to read for anyone

May 21, 2010 03:10 AM

Homeowners: Should you select Foreclosure versus Short Sale?

Comments(2)

Maria Mastrolonardo, IL Probate Specialist

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Additional Information

Issue	Foreclosure	Successful Short Sale
Future Fannie Mae Loan (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 Loan (Non-Primary Residence²)	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.	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 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 property foreclosed upon or given title or deed in lieu thereof in the last 7 years?" This affects future rates.	There is no similar declaration or question regarding a short sale.
Credit Score	Score may be lowered anywhere from 250 to more than 300 points. Typically affects a credit score for over 3 years.	Only late payments show; and after sale, mortgage typically reported ‘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 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 reporting item for ‘short sale'. The loan is typically reported ‘paid in full, settled'.
Security Clearance	Foreclosure is the most challenging issue against a security clearance (besides a felony conviction or serious misdemeanor). With a foreclosure on the record of a police officer, law enforcement, military servicemember, CIA employee, or any position requiring a security clearance, clearance will be revoked and position will be terminated (in almost all cases).	On its own, a short sale does not challenge most security clearances.³
Current Employment	Employers have the right and are actively checking the credit of all employees who are in sensitive positions. In many cases, a foreclosure is reason for immediate reassignment or termination. In some states, your real estate license (or other state licenses) may be revoked.	A short sale is not reported on a credit report and is therefore not a challenge to employment.⁴
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 future employment.⁵
Deficiency Judgment	In deficiency states, 100% of foreclosures the bank has the right to pursue a deficiency judgment. In non-deficiency states (such as CA), even after a foreclosure, a deficiency judgment may still be pursued by junior lienholders (2^nd and 3^rd trust deed holders); or by holders of non-recourse loans (such as a HELOC with a personal guarantee).	With a successful short sale negotiation, the lender can agree to give up the right to pursue a deficiency judgment against the homeowner.
Deficiency Judgment (amount)	In a foreclosure, the home will either sell at auction or the lender will take it back and sell it as an REO. This typically results in a lower sales price and longer sell-time in a declining market, which results in a higher possible deficiency judgment (in those states that allow such).	In successful short sale, the home is sold at a higher price than an auction or REO sale, resulting in a lower deficiency.