Short Sale vs. Foreclosure

Below is a table to help break down the difference of how a foreclosure and a short sale will affect you.

Issue

Foreclosure

Successful Short Sale

Credit Score

 

 

 

A foreclosure will show up as a public record on your credit report, the same as a bankruptcy will show. The impact of a foreclosure can be anywhere from 200 to over 300 points.  The foreclosure with typically will affect score for a minimum of 3 years and will report for 7 to 10 years.

 

 

 

With a short sale, only late payments on mortgage will show on your credit report. Once the short sale is completed, it will be reported as “settled for less than full amount due” (or similar verbiage).  Depending on the number of other trade lines you have, balances on credit card accounts and if everything else is kept current, the impact can be as little as 50 points. A short sale’s affect can be a brief as 12 to 18 months.

 

 

 

Credit History

 

 

 

Along with the late payments, the foreclosure will remain as a public record your credit history for 7 to 10 years.  

 

 

 

Only the late payments will be reported on your credit. The short sale will appear the same as a charge off on a credit card and will be reported as “settled for less than full amount due” (or similar verbiage).

 

 

 

Future Home Purchase (Primary Residence - Fannie Mae Loan) (effective May 21, 2008)

 

 

 

Any individual that loses their property to foreclosure will not be eligible for a Fannie Mae backed mortgage for a period of 5 years.

 

 

 

Any individual that successfully completes a short sale will be eligible for a Fannie Mae backed mortgage after only 2 years.

 

 

 

Future Home Purchase (Non Primary Residence - Fannie Mae Loan) (effective May 21, 2008)

 

 

 

Any investor that loses their property to foreclosure will not be eligible for a Fannie Mae backed mortgage for a period of 7 years.

 

 

 

Any investor that successfully completes a short sale will be eligible for a Fannie Mae backed mortgage after only 2 years.

 

 

 

** NOTE – Fannie Mae is currently the largest insurer of residential mortgages with Freddie Mac as the second. Freddie Mac’s guidelines are typically the same as Fannie Mae.

Future Loan with any Mortgage Company

 

 

 

On any future loan application that is completed, the prospective borrower will need to answer YES to question C in Section VIII of the standard 1003 that asks “Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?” this may affect future rates after the 5-7 waiting period.

 

 

 

There currently are not any questions related to a short sale on the loan application.

 

 

Deficiency Rights

 

 

 

In California, many loans give the lender the right to pursue the homeowner for a deficiency after the foreclosure has taken place. (each state’s laws are different)*

 

 

During the short sale negotiations, in most cases we are able to have the lender agree in writing to release the homeowner from any future deficiency right after the close of escrow.*

 

 

Amount of the Deficiency Judgment

 

 

 

In a foreclosure, the final sales price is lower than in a short sale and the fees involved for the bank are higher.  If the lender does have deficiency rights, this can result in a higher amount that they will be able to pursue.*

 

 

The sales price in a short sale is typically at market value or just bellow. In most cases, the amount of the right off is smaller than in a foreclosure, which would result in a smaller amount that the lender could pursue if a deficiency judgment was available. *

 

 

Taxes

 

 

At the end of the year, the lender will send out a 1099-A for the amount that they have written off. The 1099-A will show that amount as income in which the home owner may or may not be responsible for paying.  Insolvency may be an option to have the amount forgiven. *

 

 

At the end of the year, the lender will send out a 1099-C for the amount that they have written off. The 1099-C will show that amount as income in which the home owner may or may not be responsible for paying. The Mortgage Debt Relief Act of 2007 protects many homeowners that have completed a short sale. If the homeowner does not qualify under the Mortgage Debt Relief act, insolvency may be the other option to have the amount forgiven. *

 

 

Current Employment

 

 

 

Employers have the right to check the credit of all employees who are in sensitive positions. In some positions, a foreclosure may be grounds for reassignment or termination.

 

 

 

A short sale is not a public record and is reported separately on a credit report. The employer will only see late payments and an account that has been settled. This shows that you worked with the lender towards a resolution and typically looks much better to the employer.

 

 

Future Employment

 

 

 

Most employers require a credit report and background check on all job applicants. A foreclosure may pose as one of the most significant hurdles when seeking employment.

 

 

 

A short sale is not a public record and is reported separately on a credit report. The employer will only see late payments and an account that has been settled. This shows that you worked with the lender towards a resolution and typically looks much better to the potential employer.

 

 

Security Clearances

 

 

 

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 in almost all cases clearance will be revoked and position will be terminated.

 

 

 

A Short Sale on its own does not challenge most security clearances.

 

 

 

 

** We are not tax experts or attorneys. The information provided is for informational purposes ONLY. It will serve in a starting point to further investigate how a short sale or foreclosure may effect you. We HIGHLY RECOMMEND that you consult a CPA/tax advisor and/or and attorney regarding your specific situation BEFORE you consider a short sale, deed-in-lieu-of-foreclosure or foreclosure. **

 

 

 

 

 

Glen Henderson & Shannon Keatley & Glen Henderson
Alliance Group Real Estate
Glen Henderson Ph: 619-777-6716Glen Ph:619-889-7646Fax:619-374-1934
3131 Camino Del Rio N, Ste 1170
San Diego, CA 92108 US
01870483
Alliance Group Real Estate Services 3131 Camino Del Rio N, Ste 1170, San Diego, CA 92108


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