Foreclosure VS. Short Sale
Homeowner Consequences
When it comes to your future as a homeowner, it's important to understand the realities and consequences of short sales and foreclosure. The following table compares the effects each option can have on your finanacial future. Use this information to better understand your options and make and informed decision about how to proceed.
| ISSUE | FORECLOSURE | SUCCESSFUL SHORT SALES |
|---|---|---|
| Privacy | In a foreclosure, public notices are required to be filed many times throughout the process. This is a public proceeding so information is available to the media and on the internet throughout the process | In a successful short sale your home can be sold just like it would be sold in a traditional sale or it can be sold quietly without signage, open houses or broker tours. Often times your neighbors won't even know it's been sold until the new owners move in. A notice of default does require public notice but if privacy is a big concern we can talk about ways to try and prevent this from happening. |
| Future Fannie Mae Loan - Primary Residence * | A 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 only 2 years. |
| Future Fannie Mae Loan - Non-Primary * | 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 only 2 years. |
| Future Loan with any Mortgage Company | On any future application, a prospective borrower will have to answer YES to question C in Section VIII 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. | There is no similar declaration or question regarding a short sale. |
| Credit Score | Score may be lowered anywhere from 250 to more than 300 points. Typically will affect a credit score for over 3 years. | 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 80 points if all other payments are being made. A short sale's effect can be as brief as 12 to 18 months./td> |
| Credit History | Foreclosure will remain as a public record permanently, and on a person's credit history for 10 years or more. | A short sale is not reported on a credit history. There is no specific reporting item for 'short sale' . The loan is typically reported 'paid in full, settled'. |
| Current Employment | 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. | A short sale is not reported on a credit report and is therefore not a challenge to employment. |
| Future 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. | A short sale is not reported on a credit report and is therefore not a challenge to future employment. |
| Security Clearance | Foreclosure is the most challenging issue against security clearance outside serious misdemeanors or felony convictions. If a client is a member of the police, military, CIA, or any other position that requires security clearance, in many cases clearance will be revoked and the position will be terminated. | On its own, a short sale does not challenge most security clearances.** |
| Deficiency Judgement for First Mortgage? | No. In California due to the one-action rule if a foreclosure is completed by non-judicial means, a second action to recover a deficiency judgement is not permitted. | No. SB931 which took effect in 01/2011 prohibits banks from pursuing deficiency judgements against sellers on first liens in California regardless of whether the seller has refinanced or pulled cash out of a property. |
| Deficiency Judgement for Second and Other Junior Liens? | Yes. Borrower can be held personally liable for second mortgages even after the first mortgage has been foreclosed upon. 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. | Yes, however…Borrower can be held personally liable for second mortgage so negotiate to remove deficiency verbiage from any short sale agreement for those junior liens. 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. Even so, in a short sale the goal is to negotiate that deficiency language be removed from the short sale agreement and is one of the primary benefits of a short sale.. |
* Fannie Mae Announcement 08-16: Michael A. Quinn. Senior Vice President, Single Family Risk Officer
** Short sales are currently not explicitly reported on a credit report.
This information was provided to you so that you would understand not only what
the ramifications of a foreclosure
are, but that there are options and hope.
Contact me today
for a consultation at (707) 769-4278
Info Provided by CDPE.