There are many homeowners today without a clear understanding of the differences between a foreclosure and a short sale. The consequences a homeowner faces between the two can have a huge impact on their credit and employment especially if their job requires a security clearance.
In an effort to help these homeowners who may not be aware of the advantages and disadvantages of foreclosure vs short sale, I would like to explain the points at issue and consequences of both.
In a foreclosure credit your credit score may be lowered from 250 to over 300 points and it typically can affect your score for over 3 years.
With a successful short sale on your home only late payments on a mortgage will show and after sale mortgage will be reported as paid or negotiated. This will lower the credit score as little as 50 points if all other payments are being made. The effect of a short sale can be as brief ans 12 to 18 months.
Your credit history in a foreclosure will remain as a public record for 10 years or more. A short sale is not reported on your credit history as there is no specific reporting item for a "short sale." The loan is typically reported "paid in full, settled."
Outside of a conviction of a serious misdemeanor or felony a foreclosure is the most challenging issue against a security clearance. If you are in the military, in the CIA, Security, are a police officer or any other position that requires a security clearance and have a foreclosure in almost all cases that clearance will be revoked and the position terminated. A short sale on its own does not challenge most security clearances.
If you are currently employed employers have the right and are actively checking the credit regularly of all employees who are in sensitive positions. In many cases a foreclosure is grounds for immediate reassignment or termination. Since a short sale is not reported on a credit report it is as a result not a challenge to employment.
In the case of future employment many employers are requiring credit checks on all job applicants. In most cases a foreclosure will challenge employment and is one of the most detrimental credit items an applicant can have. As stated above because a short sale is not reported on a credit report as a result is not a challenge to employment.
A bank has the right to pursue a deficiency judgment in 100% of foreclosures (except in those states where there is no deficiency). It is possible in some successful short sales to convince the lender to give up the right to pursuit a deficiency judgment against a homeowner.
In regards to deficiency judgment amounts a home in foreclosure will have to go through an REO process if it does not sell at auction and can in most instances result in a lower sales price and longer time to sell in a declining market. This will result in a higher possible deficiency judgment.
When a short sale is properly managed a home is sold at a price that should be close to market value and in almost all instances will be better than an REO sale resulting in a lower deficiency.
The period for eligibility of a future loan differ greatly between a homeowner who loses a home to foreclosure and a homeowner who successfully negotiates and closes a short sale.
Effective May 21, 2008 the homeowner of a primary residence who loses a home to foreclosure is ineligible for a Fannie Mae backed mortgage for a period of 5 years. With a successfully negotiated and closed short sale a homeowner will be eligible for a Fannie Mae backed mortgage after only 2 years. In a non-primary residence 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. In a successfully negotiated and closed short sale an investor will be eligible for a Fannie Mae backed investment after only 2 years.
Eligibility for a future loan with any mortgage company for a homeowner who loses a home to foreclosure will affect their future rates and will require the prospective borrower to answer YES to question C in Section VII of the stand 1003 application that asks "Have you had property foreclosed upon or given title or deed in lie thereof in the last 7 years?" There is no similar question or declaration regarding a short sale.
A short sale is an emotional transaction but as a Certified Distressed Property Expert, I want to help take the stress out of losing your home to foreclosure and explain the full range of solutions that are available. Call me today for a confidential consultation.
Donna Bigda
Licensed Connecticut REALTOR®
10 Pine Orchard Road
Branford, Connecticut 06405
Call Donna at 203-488-1641, ext. 214
Fax 203-315-2127
by email Donna@DonnaBigda.com
or visit www.distressedhomeownershelpline.com
Mortgage Assistance Relief Services Disclosure
RE/MAX Alliance is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan. If you stop paying your mortgage, you could lose your home and damage your credit rating. RE/MAX Alliance is not engaged in the practice of law nor gives legal or tax advice. It is strongly recommended that you seek appropriate professional legal counsel and tax advice for any real estate transaction.
Disclaimer: All information provided by this author is strictly an opinion, is not guaranteed, may be based on information collected from several sources, which may or may not be deemed reliable at the time of researching this article and may be time sensitive. Sellers are advised to obtain legal advice regarding the advisability and terms of any short sale agreement with creditor(s) and professional tax advice regarding tax implications of a sale.
Copyright © 2009 by Donna Bigda, All Rights Reserved ...*Foreclosure vs Short Sale*
Donna - I learned a lot of things I was unaware of regarding the impact on your credit... and on you employment. Very important to know the difference between a short sales vs. foreclosure.
Donna, this is a very thorough explanation of the difference between short sale and foreclosure.
Great comparative analysis Donna. The short sale doesn't seem near as problematic as an all out foreclosure.
Donna - thank you for getting the word out regarding the difference between a short sale and foreclosure. So good to get a refresher from a fellow CDPE agent. Keep up the work on saving people from foreclosure.
Donna, well done. I for one am glad to see someone else pointing out the consequences of foreclosure. Too many people think it's a quick fix with no strings. It is sad to see short sales, but at least it shows some effort on the owner's behalf to make right on their commitments, and show some personal responsibility.
Hi Donna;
I love your explanation of the difference between foreclosure vs. short sales, I was not aware of the impact on you employment.
Joan - It seems we can't learn enough about short sales and foreclosures and how they impact a homeowner in so many ways.
Frank & Sharon - The consequence for homeowners between a foreclosure and a short sale are so dramatic and important information they should be aware of.
Gary -While it's unfortunate that homeowners have to go through either of them at least a short sale is not as damaging.
Brian - So nice to hear from a fellow CDPE agent. I know now who to contact if I ever have a referral in the Western Washington state area.
Tim - It is indeed very sad to see the number of homeowners who are facing foreclosure or going through a short sale. While some may be looking for an easy way out, there are so many others who truly need help.
Anthony - I think the impact of the difference between a foreclosure and a short sale on someone's current or future employment is something many homeowners are not aware of.
Thank you, Donna. I was not aware that a foreclosure could impact employment, especially of those who are currently employed. That's an interesting piece of information to keep in mind. I'm going to let my circle know about that.
Heather - In the case of a foreclosure it can definitely challenge the current or future employment of a homeowner especially if they hold a sensitive position. I appreciate that it is something you would like to share with your circle.
Donna - Great explanation about the difference between a short sale and foreclosure.
Donna- Great info thank you. Have you heard anything about how a deed in lieu affects the credit profile when compared to a foreclosure and/or short sale?
Thank you again for the valuable information.
Robert - Thanks you.
Jay - It does very much affect credit. A deed in lieu is just a step below a foreclosure and if there are any late payments leading up to the deed in lieu they be reported on your credit. Also on any future loan applications the question on the 1003 that asks "Have you had a property foreclosed upon or given title or deed in lieu thereof in the last 7 years?
Donna, so may foreclosures, and Short Sales these days, that Buyers and Sellers need all the information that they can get to make informed decisions.
Thank you Donna. I reblogged you - I have had so many people ask me what the difference is - I couldn't have explained it better!!
Donna,
You did a great job clearly explaining the differences between a short sale and a foreclosure. It's so important these days that the consumer understand.
Great points ... to many of these people are in denial.
Thank you!!! This is a great article.
It's interesting to read the comments on this post. My thought on this topic is - given these consequences to the consumer, why in the world do loan servicers and banks take so long to accept short sale offers? A short sale is better for everyone involved, by dragging out the acceptance of short sales, the lenders hurt the homeowner, the investor and the local real estate market.
Kate,
Banks don't give a damn about consumer and why should they. They are being rewarded by the current administration when by all rights the banks that are failures, even the ones "too large to fail" should have been dismantled and let fall.
It's going to be a long road to recovery and throwing out the unreliable and inaccurate credit scoring practices would serve all consumers well.
The inability to land job based on a foreclosure is just a large pile of @#$%&
Hi Donna,
Great information! Thank you for sharing. I think a lot of people may opt for a foreclosure just because they don't want to deal with it any longer. But knowing how their decision will affect them long term is crucial.
Donna nice job comparing the differences in a short sale and foreclosure. I would challenge your assertion however that your credit score will only drop by 50 points and there will be no reporting of a short sale on your credit report. While it is better to have a short sale than a foreclosure I think your are understating the impact a short sale has on ones credit.
Donna - I was unaware of the possibility of termination or re-assignment for those with security clearances. If sellers do not understand this upfront, this could be a tragic blow in an already bad situation. Thanks for sharing this valuable info.
Great Job Donna! Thank you for sharing this valuable info. You did a wonderful job on comparision and differences between. I din't know that it can hurt the employment.
Great post, Donna! Excellent information to fight the war!
I had know idea a foreclosure would effect a security clearance. Wow!
I. also, was impressed with your explaination. From a Mortgage brokers prospective, I deal with aftermat of foreclosure and short sales every day. I only wish that short sales were easier, the banks more reasonable and realtors more skilled at doing them. Trained mitigators are in short supply and the banks are down to teller level in many cases. Also, sense pieces of many loans are owned by people all over the world, the servicers are afraid of massive lawsuits if they modify or short sale leaving foreclosure as the only option. A realtor, attempting a short sale, many times have no idea what they are up against. I have much admiration for those of you who try.
This was some very helpful information. Being a fairly new agent in this market can be difficult. Posts like yours keep me well informed. Thank you
Jennifer Tellier
Donna, congrats on being featured in the newsletter! Love the information presented here.
Donna,
Nice job with your post. The CDPE course is highly recommended. A real eye opener to many things that I did not know. I've completed the course, just waiting for the formal notice of the earned designation.
Thank you Donna, I am showing a short sale house this week and had no idea what a short sale was vs. a foreclosure or how to transact one and your information was so timely that If there is an offer I will be more prepared to handle it.
Thanks again for sharing this information.
Elaine Grandolfi
Weichert Realtors, Cape Cod
Hi Donna,
Your explanation is great good to know the diference; Foreclosure vs Short Sale, thank you for your time to sharing this information.
Best,
Mirian Carlech
Charles Rutenberg Realty Inc. NY
Thank you for your clarification on foreclosure vs short sale. Sometimes we as real estate professionals still get a little mixed in the brain with everything that goes on in our industry. Have a great week!
Sorry I don't agree with alot of your points based on past experiences of clients. Short sales do biff your credit score more than you say. There is no way that I've seen a mortgage on a short say, paid in full like a bad medical bill. Banks can or cannot pursue the defiency judgement against the seller - you won't know until it happens to you.
I wish more buyers could negotiate their way of this mess with their lenders. Both options of short sales and foreclosures aren't good.
Donna, very good artilce. Do you know what happens to the credit score if the Lenders reports it as "paid less the agreed" or somethin to that effect?
Thank you
Donna, thanks for a detailed and understandable description of what happens in each of these cases. I'm finding that, sadly, there are also many REALTORS who do not understand the difference between short sales and foreclosures. I recently had one agent put in an offer on a short sale property, and sign the short sale addendum which explains the negotiation process and time involved, then could not understand why I did not have an answer for her a week later. When she commented that other banks had responded in just a couple of days, I realized she did not understand the difference, and when I asked her outright if these other properties had been foreclosed / bank owned or if they were still possible short sales, she frankly confessed that she did not know the difference.
I appreciate the time and effort that you put into acquiring this information, and in passing it along to us! Thanks.
The best thing to do is talk to your lender about a short sale rather than going in for a foreclosure. If he agrees, you can prevent a deficiency judgment.
Another advantage with a short sale is that it can improve your credit, as it will feature as a ’settled debt’. Of course, it all depends on what your lender agrees to, so talk to him about it to establish how it will figure on your credit report and preferably get it in writing.
A short sale means the loss of your home. You can refer to online resources like StopForeclosureBlog.net for solutions to help you keep your home as well as for valuable resources like articles, videos and guides that will help you prevent foreclosure.
Great post and this is why short sales are such a win-win for everyone involved. Sellers can get back on their feet quicker- I even offer a credit repair service I include for my clients. Banks save money! We make the sale and earn our commission. We have streamlined the process and have had great success helping more homeowners in distress with a short sale or a loan modification.
Nice blog! Certainly a significant difference between a foreclosure and a short sale, and its always good to have all the options available out on the table for a customer to make the best decision. Thanks!