What's the Difference Between a Short Sale and a Foreclosure?
Review the following comparisons between short sales and foreclosures for a better understanding of why short sales are a better option for most homeowners. While a short sale is a complicated process, the outcomes of your patience and diligence are worth it in the end!
What are the implications to my credit score?What are the implications to my credit history?Who decides if my home should undergo a foreclosure or a short sale?How long will I have to wait to buy another home?What will be the effects on my future loans?Does it affect my employment opportunites?How does a short sale versus a foreclosure affect the deficiency judgment?
What are the implications to my credit score?
Following a successful short sale your mortgage will be reported on your credit score as either paid or negotiated, lowering your score as little as 50 points and affecting you for only 12 to 18 months. After a foreclosure, however, your credit score can lower as much as 300 and usually at a minimum of 250 points and affects your score for over three years.
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What are the implications to my credit history?
A short sale is usually reported as paid in full and is not reported on your credit history. A foreclosure will remain on your credit history for 10 years or more and will remain as public record.
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Who decides if my home should undergo a foreclosure or a short sale?
In both short sales and foreclosure, the decision is made by your mortgage lender. The most important aspects to getting a lender to agree to a short sale, and saving you the more damaging credit implications of a foreclosure, is to prove that you have no other way to pay the mortgage and that the amount received from a short sale is the fair price of the market. Lenders who believe they can receive more by taking possession of the home in a foreclosure and selling it themselves will not agree to a short sale.
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How long will I have to wait to buy another home?
After a foreclosure, you may end up waiting another 24 to 72 months before a mortgage lender will offer you an interest rate that is acceptable. Most mortgage lenders report that for homeowners who have undergone a previous short sale they may get a reasonable interest rate in less than two years. Fannie Mae guidelines allow a short seller to apply for a new loan immediately if payments were kept current and had no 60-day late payments on their record.
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What will be the effects on my future loans?
For most mortgage lenders you will not be asked to declare or be questioned regarding a short sale on any standard loan application (1003). In regards to foreclosure, you will be asked on any future standard loan application (1003) if you have had a property foreclosed in the last seven years, therefore affecting your rate. Fannie Mae backed mortgages will be available to you following a short sale after two years. Fannie Mae backed mortgages will not be available to you for at least five years if you have lost your home due to a foreclosure.
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Does it affect my employment opportunites?
A short sale does not appear on a credit report and will not challenge your current employment status. In comparison, if you have a foreclosure on your credit report, some employers consider it a reason for termination or reassignment since many run credit checks on employees for certain positions. A foreclosure can be extremely harmful to your chance of being selected for a new job if your credit report is taken into consideration.
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How does a short sale versus a foreclosure affect the deficiency judgment?
If your short sale is handled successfully, the lender may give up the right to pursue a deficiency judgment against you. If the lender does pursue a deficiency judgment against you after a successful short sale, the amount will be considerably lower because your home was sold at a price closer to market value than that of an REO (Real Estate-Owned) sale. In all foreclosures, with the exception of those states without deficiency, the bank has the right to file a deficiency judgment against you. Since your foreclosed home will have to go through the REO process if not sold at auction for a lower sales price, this results in a higher deficiency judgment against you.
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FORECLOSURE vs. SHORT SALE
||Successful Short Sale
|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.
||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 50 points if all other payments are being made. A short sale’s effect can be as brief as 12 to 18 months.
||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’.
||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.
||On its own, a short sale does not challenge most security clearances.
||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.
||Many employers are requiring credit checks on all job applicants. A foreclosure is one of the most mental 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.
||In 100% of foreclosures (except in those states where there is no deficiency), the bank has the right to pursue a deficiency judgment.
||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)
||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.
||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.
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Disclaimer: The information provided on this website should not be constituted as legal advice. The content is intended to provide general information about the short sale and foreclosure processes, and should not be acted upon without the counsel of a qualified REALTOR®, attorney, and tax expert.