SHORT SALE vs. FORECLOSURE

What is the difference? By now you may know that a “Short Sale” is a lender approved sale of real estate in which the sale price is less than (or short of) the mortgage balance. A foreclosure however is where the bank takes the property and either it is sold through auction or sold by the bank in the open market.

What about the homeowner? After the smoke clears where does the homeowner stand? Obviously if the bank is loosing money, the borrower will not be taking anything away from the transaction. In the best case scenario the homeowner walks away without any liability and minimal credit damage. This is not the case with foreclosure.

It’s important to note that Short Sales will not work if the property has sufficient equity for the lender to foreclose, sell as an REO and at least break even. The homeowner must be thoroughly "upside-down" in their loan and be able to prove a legitimate hardship for a lender to approve the transaction.

The average cost for a lender to foreclose is approximately $50,000 and there are reserves that lenders are required hold to back up non-performing loans. Lenders don’t like to tie up resources to back up these loans and are generally open to alternatives.


The outline below will help to establish some of the major differences (impact to the borrower) between Short Sales and Foreclosure.

CREDIT SCORE

Foreclosure: Credit scores can suffer a loss of approximately 250 to more than 300 points and generally this can affect credit for over 3 years.

Short Sale: Late payments on mortgage will show and after the property is sold the loan is normally reported as ‘paid as agreed’, ‘paid as negotiated’ or ‘settled’. This can lower a credit score by as little as 50 as long as other accounts are being maintained. A short sale can influence a credit rating for as little as 12 to 18 months.

CREDIT HISTORY

Foreclosure: A foreclosure remains as a public record permanently and as part of a personal credit history for 10 years or more.

Short Sale: a short sale is not reported in a credit history. There is no specific report for short sales and the loan is generally reported as ‘paid’ or ‘settled’.

DEFICIENCY JUDGMENT

Foreclosure: In the State of California a lender has the right to pursue a deficiency judgment through judicial foreclosure.

Short Sale: The deficiency can be a point of negotiation with the lender

DEFICIENCY JUDGMENT (amount)

Foreclosure: The home will need to go through the REO process if it fails to sell at auction. Generally this results in a lower sales price and can take longer to sell, especially in a declining market. Bank offer these propertied “as is” and that will scare off many potential buyers. All these delays can result in a higher deficiency.

Short Sale: With a properly managed short sale the property should sell at close to market price resulting in a lower deficiency.

FANNIE MAE (primary residence)

Foreclosure: A homeowner who looses a home to foreclosure is ineligible for Fannie Mae-backed loans for a period of 5 years.

Short Sale: After successfully negotiating and closing a short sale the homeowner is eligible for a Fannie Mae-backed loan in 2 years.

FANNIE MAE (non-primary)

Foreclosure: An investor who looses property to foreclosure is ineligible for Fannie Mae-backed loans for a period of 7 years.

Short Sale: After successfully negotiating and closing a short sale an investor is eligible for a Fannie Mae-backed loan in 2 years.

MORTGAGE COMPANIES

Foreclosure: On any future loan applications, a prospective borrower will be required to answer YES to question C in Section VIII of the standard 1003 form that asks “Have you ever had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?” This will affect future interest rates.

Short Sale: There is no similar declaration or question regarding short sales.

SECURITY CLEARANCE

Foreclosure: As with a serious misdemeanor or felony conviction, foreclosure is a critical issue where a security clearance is concerned. In nearly all cases clearance will be revoked and the position will bet terminated.

Short Sale: On its own, a short sale does not challenge most security clearances.

CURRENT EMPLOYMENT

Foreclosure: Employers have the right and actively check the credit of all employees in sensitive positions. Foreclosure is frequently grounds for reassignment or termination.

Short Sale: A short sale is not report on a credit report and as such is not a challenge to employment.

FUTURE EMPLOYMENT

Foreclosure: Credit checks are required for applicants by many employers. A foreclose is among the most detrimental credit item an applicant can have and in many cases will challenge employment.

Short Sale: A short sale is not report on a credit report and as such is not a challenge to employment.