Foreclosure V.S. Short Sale- Homeowner Consequences
Tuesday, October 11, 2011
In almost all cases, it is better to attempt a successful Short Sale than to Foreclose on your home. The Steamboat Heritage Title Office gave us some great information to share with you about what effects foreclosures and short sales will have on future loans, credit score and even your current and future employment. It is really amazing how much can be affected by a foreclosure. To discuss with the Heritage Title Office directly, phone them at (970) 879-1611 and let them know the Boyd Team provided you with their Homeowner Consequences pamphlet, or call Cam at (970) 846-8100 if you have specific questions about needing to sell your home before it forecloses.
Issue: Future Fannie Mai 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.
Sucessful 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.
Issue: 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.
Sucessful 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.
Issue: Future Loan With An Morgage Company
Foreclosure: 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.
Successful Short Sales: There is no similar declaration or question regarding a short sale.
Issue: 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 teh score as little as 50 points if all other payments are being made. A short sale’s effect can be as brief as 12-18 months.
Issue: Credit History
Foreclosure: Foreclosure will remain as a public record permanently, and on a person’s credit history for 10 years.
Sucessful Short Sale: 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.”
Issue: 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 will be terminated.
Successful Short Sale: On its own, a short sale does not challenge most security clearances.
Issue: Current Employment
Foreclosure: Employers have the right and are actively checking on 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.
Issue: 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 judgement.
Successful Short Sale: In some successful short sales, it is possible to convince the lender to give up the right to pursue a deficiency judgement against the homeowner.
Issue: Deficiency Judgement (Amount)
Foreclosure: in a foreclosure, the home will have to go through an REO process if it dose not sell at auction. in most cases this will result in a lower sales price and a longer time to sell 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.