Foreclosure vs Short Sale

A homeowner thinking of a short sale recently asked us why they should short sale versus just walking away and letting their lender foreclose on the home. Whether you should do a short sale or let the home go to foreclosure depends on several factors. 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. The following are examples to consider.

ISSUE	FORECLOSURE	SHORT SALE
Fannie Mae Finance A 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.
Finance 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.	An investor who successfully negotiates and closes a short sale will be eligible for a Fannie- Mae backed investment after only 2 years.
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 will be reported as paid or negotiated. This will lower the score by more minimal points than Foreclosure if all other payments are being made. A short sale’s effect can be as brief as 12 to 18 months.
Credit History	Foreclosures will remain as a public record on a person’s credit history for 10 years or more.	Short sale is not reported on a credit history. There is no specific reporting item for a ‘short sale’. The loan is typically reported ‘settled for less than full amount’.
Security Clearance	Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. 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, clearance may be revoked and position can be terminated.	A Short Sale on its own does not challenge most security clearance.
Current Employment	Employers have the right and are actively checking the credit regularly of all employees who are in sensitive positions. A foreclosure in many cases is a ground for immediate reassignment or termination.	A Short Sale is not reported on credit report and 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 therefore not a challenge to employment.
Deficiency Judgment	In 100% of foreclosures (except 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. Some Lenders require a promissory note at closing for a minimum amount.
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 property 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.