I've been asked so many times over the past several months if there are any advantages to succesfully accomplishing a "Short" sale versus just letting the Foreclosure process run its course. So I've decided to write this post highlighting the major differences between a Short Sale and a Foreclosure, and how will it will probably affect a seller/property owner?
This is an all too common question being asked today for property owners in Greater Miami and Miami Beach, be it an owner of a Miami Beach single family home or condo. In my experience, most owners or property investors who purchased after 2003, and whose total housing expenses exceed 31% of gross income are dealing with this issue. To keep things as simple and brief as possible, I am not going to go into the details of these transactions; rather I'm going to give my way of explaining these terms when someone asks me this very question. At Fortune International, we have an experienced and dedicated team of agents, lawyers, and paralegals, and administrative assistants that have had success negotiating zero deficiency judgements for short sales worth millions of dollars. It's not an easy process, and requires dedicated and persistent follow up with lenders, lawyers, bank negotiators, condo associations, and various other debt holders.
- A short sale is when a homeowner is trying to sell for less than the amount owed on the loan, this type of transaction requires bank approval and there are certain guidelines and pre-requisites a bank will ask for prior to s short sale approval.
- A foreclosure is when the lender takes over the property. A court ordered sale is required prior to the foreclosure and at this sale if no buyer comes forward who is willing to pay the minimum bid for the property, then the lender takes possession and the property is foreclosed on.
The following breakdown is courtesy of Oliver Ruiz, General Manager of Fortune International and President of the Miami Board of Realtors:
Fannie Mae Mortgage Eligibility (Primary Residence):
- 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 2 years
- 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 2 years.
- On any future loan application, a prospective borrower will have to answer YES to question C in Section VII of the standard 1003 that asks “Have you had property foreclosed upon or given title or deed in lieu thereof of the last 7 years?” This will affect future rates.
- There is no similar declaration or question regarding a short sale.
- Score may be lowered anywhere from 250 to over 300 points due to a foreclosure. Typically will affect score for over 3 years.
- Only late payments on mortgage will be reported as paid or negotiated. This will lower the score as little as 50 points, if all other payments are being made. A short sale’s affect can be 12 to 18 months on an individual credit score.
- Foreclosure will remain as a public record on a person’s credit history for 10 years or more.
- Short sale is not reported on a credit history. There is no specific reporting item for “short sale.”
- Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. If a client has a foreclosure and is a police officer, in the military, in the CIS, Security, or any other position that requires a security clearance will be revoked and position could be terminated.
- Short Sale, on its own, does not challenge most security clearances.
- Employers have the right and are actively checking the credit regularly of all employees who are in sensitive positions. A foreclosure, in some cases, can be grounds for immediate reassignment or termination.
- Short Sale is not reported on a credit report and is, therefore, not a challenge to 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.
- Short sale is not reported on a credit report and is therefore not a challenge to employment.
- In 100% of foreclosures (except in those states where there is no deficiency), the bank has the right to pursue a deficiency judgment.
- In some successful short sales, it is possible to convince the lender to give up the right pursue deficiency judgment against the homeowner.
- 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 sell in a declining market. This will result in 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 Foreclosure sale resulting in a lower deficiency.