Foreclosure vs. Short Sale . . . Homeowner Consequences

Real Estate Agent with RE/MAX Professionals, CT 203-206-0754 REB.0759001

A home owner in a distressed loan on their mortgage faces many concerns, not only to their immediate situation, but also to the down the road consequences of their decision. For some owners that are so deeply under water foreclosure may be the only option. However, this is a decision that they must thoroughly analyze and consider with the assistance and guidance from either a qualified lawyer or a Realtor familiar with the short sale process, or both. There are numerous issues that impact their decision, and if they choose the wrong mechanism for relief it will take years to recover, if at all.

Here is a compilation of the more common issues and their impact on a consumer. 

Future Primary Residence purchase if the consumer elects a foreclosure:

  • Homeowner will be ineligible for a Fannie Mae mortgage for 5 years
  • For an investor, the Fannie Mae period is 7 years
  • Future rates will be impacted because of the foreclosure
  • Credit scores may be lowered from 250-300 points for a period of at least 3 years
  • Foreclosure will appear on their credit scores and as a public record for 10 years or more
  • Any security clearance will be affected as this is considered a misdemeanor or felony conviction. If the borrower is in the military, or in any position that requires a security clearance, their position can be terminated
  • With some employers a foreclosure can be considered a reason for immediate termination
  • Future employers that require credit checks may challenge the prospective employee
  • Banks can pursue a deficiency judgment for the outstanding loan value with interest and collection costs

Future Primary Residence purchase if the consumer elects a short sale:

  • Homeowner will be eligible for a Fannie Mae mortgage after 2 years
  • For an investor, the Fannie Mae period is 2 years
  • There should be no future complications with credit rates
  • Only late payments may show if the final settlement is not correctly terminated, which could result in as little as a 50 point drop for 12 to 18 months
  • A short sale is not reported on credit history
  • A short sale on it's own does not affect a security clearance
  • A short sale is not reported on a credit report and is no challenge to current or future employment
  • In some successful short sales, it possible that the lender will surrender the right to any future deficiency judgments against the homeowner.

It becomes very important that once the home owner recognizes their problem and has investigated all other possible avenues to resolve their financial problems that they meet with a qualified real estate agent as soon as possible and set up the plan to get the house sold and get the banks assistance and cooperation to get the loan closed with the least complications to the homeowner now and down the road.

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Ed Silva  RE/MAX Professionals,  203-206-0754


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Hannah Williams
Re/Max Eastern inc. - Philadelphia, PA
Expertise NE Philadelphia & Bucks 215-953-8818

Ed...This is very excellent information for everyone in a distressed situation..Thank you for this wonderful post


Nov 30, 2009 04:43 AM #1
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Ed, this is great information, and here are a couple of points that might also be useful.

  • The FHA ineligible period for someone with a foreclosure is 3 years.
  • Even if a Homeowner avoids foreclosure by selling the house before they are foreclosed on, the foreclosure rules will still apply if the foreclosure process was started.
Nov 30, 2009 06:47 AM #2
Philip Turner
Mortgage Banker Since 1980

This is very helpful information.  It would be nice if this information made it into the newspaper or on TV.  Most people are not aware of these differences.  They are huge.

Dec 03, 2009 12:16 PM #3
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Ed Silva

Central CT Real Estate Broker Serving all equally
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