Foreclosure "Better" than Short Sale? Not Convinced!

Real Estate Agent with Coldwell Banker United, Realtors®

Brent White, an associate law professor in Arizona, was just on Fox Business News and is spreading the message that foreclosure is not nearly as bad a credit hit as it's made out to be and that you can recover your credit within a couple of years!

He says that there's a double standard out there and that when a corporation decides to shed a bad investment it's considered wise, but when a person tries to shed a home that has become a financial albatross, it's considered bad.

I don't see how Mr. White can make the comparison between a company shedding a bad investment and a homeowner letting a property go into foreclosure.  And I'm also not sure I agree with the statement that you can recover your credit within a couple of years!

Granted, a home is an investment, but if there is a mortgage on the home then the home was used to secure the loan to pay for the home. When I think of a corporation shedding a bad investment, I think of them selling off whatever the investment is for a loss.

But it's their money in the investment, not borrowed money. And if it is borrowed money, then I would imagine they'd have to get permission from whoever loaned it to them to take a loss. Kind of like what a bank or mortgage lender does in a short sale!

It is also widely understood that a foreclosure can lower your credit score anywhere from 250 to 300 points for up to 3 years, and be reported on your credit history for up to 10 years. Where does Mr. White get that your credit will only be adversely affected for a couple of years?

There are other serious side-effects of foreclosure that one should consider.

For example, in 100% of foreclosures (except in those States where there is no deficiency), the bank has the right to pursue a deficiency judgment. A foreclosure also has to be reported on future mortgage loan applications for up to 7 years, may affect your current employment as employers have the right to check your credit, could be a question on future employment applications, and could very well result in the revocation of a security clearance.

A homeowner who loses a home to foreclosure is also ineligible for a Fannie Mae-backed mortgage for a period of 5 years if it was their primary residence and 7 years if it was an investment.


More and more I'm running into people that have heard or have been told that it's better to let their home go into foreclosure rather than selling even if they have to sell short. And this concerns me because everything I've learned and been taught about short sales and foreclosures says the exact opposite.

In some successful short sales, for example, it is possible to convince the lender to give up the right to pursue a deficiency judgment against the homeowner. Not so with a foreclosure.

A short sale is not currently reported on your credit history as there is no specific reporting item for ‘short sale'. The loan is typically reported as "paid as agree" or "paid as negotiated". Not so with a foreclosure.

A short sale can lower a credit score for as little as 50 points for as brief as 12 to 18 months. It is not recorded in public records. Not so with a foreclosure.

A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae-backed mortgage after only 2 years whether it's their primary residence or an investment. Not so with a foreclosure.

So, how is a foreclosure better than a short sale?

Comments (2)

Connie Johns
Tailored Real Estate Services - Toledo, OH
Toledo, Ohio Area Real Estate


Thank you for your comments regarding short sales versus foreclosures.  I found it an informative read.  I am of the same mindset you are.  Many of my short sale sellers actually feel better about being proactive and trying to sell the property short rather than just give up and leave the keys in the mailbox. 

Nov 23, 2009 05:16 PM
Bob & Carolin Benjamin
Benjamin Realty LLC - Gold Canyon, AZ
East Phoenix Arizona Homes

Suspect that over time there will be a shifting in the marketplace on this as so many people will be in this situation -- only time will tell.

Nov 23, 2009 06:41 PM