I thought this might help educate everyone as to why it is SO beneficial to sell your home as a short sale versus letting it fall to foreclosure. The advantages are real, tangible, and last for many years to come. Here's a helpful dialogue to walk you through the differences:
FORECLOSURE VS. SHORT SALE
Homeowner Consequences
Future Fannie Mae Loan - Primary Residence
Foreclosure: A homeowner who loses a home to foreclosure is ineligible for a Fannie Mae-backed mortgage for a period of 5 years.
Successful Short Sale: 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 Residence
Foreclosure: 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.
Successful Short Sale: 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
Foreclosure: On any future application, a prospective borrower will have to answer YES to question C in Section VII 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 will affect future rates.
Successful Short Sale: There is no similar declaration or question regarding a short sale.
Credit Score
Foreclosure: Score may be lowered anywhere from 250 to more than 300 points. Typically will affect a credit score for over 3 years.
Successful Short Sale: Only late payments on mortgage will show, and after sale, mortgage is normally reported as ‘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.
Security Clearance
Foreclosure: Foreclosure is the most challenging issue against a security clearance outside a serious misdemeanor or felony conviction. If a client has a foreclosure and is a police officer, in the military, in the CIA, security, or any other position that requires a security clearance, in almost all cases clearance will be revoked and position terminated.
Successful Short Sale: On it's own, a short sale does not challenge most security clearances.
Current Employment
Foreclosure: 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.
Successful Short Sale: A short sale is not reported on a credit report and is therefore not a challenge to employment.
Future Employment
Foreclosure: 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.
Successful Short Sale: A short sale is not reported on a credit report and is therefore not a challenge to future employment.
Deficiency Judgment
Foreclosure: In 100% of foreclosures (except in those states where there is no deficiency), the bank has the right to pursue a deficiency judgment.
Successful Shore Sale: In some successful short sales, it is possible to convince the lender to give up the right to pursue a deficiency judgment against the homeowner.
Deficiency Judgment (amount)
Foreclosure: 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 sale in a declining market. This will result in a higher possible deficiency judgment.
Successful Short Sale: 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 REO sale resulting in a lower deficiency.
Hope this helps everyone understand the serious differences...feel free to email me with questions!
--Nick
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