Why Do a Short Sale as Opposed to Foreclosure?

 

Many of my clients ask me why should I do a short sale vs. a foreclosure.  Here are a few answers to those questions.

With a Short Sale you will lose between 125-150 points on your credit score.

With a Foreclosure you will lose 250 points in most cases.

With a Short Sale we have had an 85% success rate to have the banks waive the right to come after you for the difference of the what is owed, and what the bank receives otherwise known as a deficiency judgement.

With a Foreclosure 100% of the time they get a deficiency judgement that in many cases forces the customer into bankruptcy.

With a Short Sale the ability to get a new loan is hindered, but only for 2 years.

With a foreclosure it is going to be very tough to even get a new loan.  Right now they say about 5 years minimum.

There are going to be a lot of changes to Fannie Mae or Freddie Mac in the near future as we have already seen.  With a lot of people claiming bankruptcy and doing short sales I thought this chart was great information so you can educate your customers on what to expect in the future and the consequences a short sale or foreclosure may have on the ability to obtain a new loan in the future.

Bankruptcy and Foreclosure Policy Changes (applicable to manually underwritten loans only)

In U-Memo 08-29, we detailed changes to our requirements for borrowers with a prior foreclosure in their credit history.  With this U-Memo, we are updating these requirements as well as establishing new requirements for bankruptcy and pre- foreclosure sales.  We are updating the requirements regarding the time period that must elapse before borrowers can demonstrate that they have re-established their credit history following an occurrence of a bankruptcy or foreclosure.  The following table outlines our current and new policies for manually underwritten loans:

Action	Current Requirements	New Requirements
Bankruptcy (all except chapter 13)	4 year time period from discharge date	The 4 year time period is unchanged; however it is now applied from either the discharge or dismissal date of the bankruptcy action.
Chapter 13 Bankruptcy	2 year time period from discharge date	The time period for Chapter 13 bankruptcy actions is measured as follows: ·        2 years from the discharge date,         Or ·        4 years from the dismissal date.
Exceptions for extenuating circumstances-All Bankruptcy Actions	2 year time period from discharge date.  No exception to the 2 year time period for Chapter 13 bankruptcy actions.	The 2 year time period will be measured from the bankruptcy discharge or dismissal date.  No exceptions are permitted to the 2 year time period after a Chapter 13 discharge.
Multiple Bankruptcy Filings	No existing policy	A 5 year time period date is now required from the most recent dismissal or discharge for borrowers with more than one bankruptcy filing within the past 7 years.
Exceptions for extenuating circumstances-Multiple Bankruptcy Actions	No existing policy	A 3 year time period from the most recent discharge or dismissal date is required.   NOTE:  The most recent bankruptcy filing must have been the result of extenuating circumstances.
Foreclosure	We recently updated (in U-08-29) the time period from 4 to 5 years from the date that the foreclosure sale had been completed.	Additional requirements now apply after 5 years up to 7 years following foreclosure completion date: ·        The purchase of a principal residence is permitted with a minimum 10% downpayment and a minimum credit score of 680 ·        Purchase of a second home or investment property is NOT permitted. ·        Limited cash-out  refinances are permitted for all occupancy types. ·        Cash-out refinances are not permitted for any occupancy type.
Exceptions for Extenuating Circumstances-Foreclosure	We recently updated (in U-08-29) the time period from 2 to 3 years from the date that the foreclosure sale had been completed.	Additional requirements now apply after 3 years up to 5 years following foreclosure completion date: ·        The purchase of a principal residence is permitted with a minimum 10% downpayment. ·        Limited cash-out  refinances are permitted for all occupancy types.   ·        Cash-out refinances are not permitted for any occupancy type.
Deed-in-Lieu of Foreclosure	4 year time period from completion date ( date deed-in-lieu was executed)	This 4 year time period still applies.  Now, the  following additional requirements apply after 4 years up to 7 years following completion date: ·        The greater of a minimum 10% downpayment or the minimum downpayment required for the transaction is required.  This is applicable to purchases for all occupancy types. ·        Limited cash out and cash-out refinance transactions for all occupancy types are permitted.
Exceptions for Extenuating Circumstances- Deed-in-Lieu of Foreclosure	2 year time period from completion date	This 2 year time period still applies.  Now, the  following additional requirements apply after 2 years up to 7 years following completion date: ·        The greater of a minimum 10% downpayment or the minimum downpayment required for the transaction is required.  This is applicable to purchases for all occupancy types. ·        Limited cash out and cash-out refinance transactions for all occupancy types are permitted.
Time period After Pre-foreclosure Sale	No Existing Policy	2 year time period from completion date; no additional requirements. NOTE:  No exceptions are permitted to the 2 year time periods due to extenuating circumstances.