What are the differences between foreclosure and short sale?
First of all, a homeowner who loses a home to foreclosure is ineligible for a Fannie Mae backed mortgage for a period of 5 years. However,a homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae-backed mortgage after only 2 years. That is a big difference for most people.
Another difference is on any future 1003 application (loan application), a prospective borrower will have to answer YES to question C in Section VIII of the standard 1003 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. There is no similar declaration or question regarding a short sale.
With other mortgages, such as FHA, if current before executing a short sale, a homeowner may apply for an FHA loan immediately. If homeowner is late before short sale execution, they will be eligible for a FHA loan after 3 years.
As for credit scores, with a foreclosure, the score may be lowered anywhere from 250 to over 300 points and will typically be affected for over 3 years; plus will remain as a public record on a person's credit history for 10 years or more. With a short sale, only late payments on the mortgage will show, and after the short sale, the 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 plus a short sale's effect can be as brief as 12 to 18 months. There is no specific reporting item for ‘short sale' to the credit bureau.
And finally In a foreclosure the home will have to go through an REO process if it does not sell at the 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. However, 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. In fact, 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 altogether.
So is there a difference? You bet there is... don't walk away from you mortgage. Call or email us to today to discuss how we can help you with a short sale on your home!