Foreclosure vs Short Sale
Short sale or pre-foreclosure sale involves the sale of a home wherein the lender agrees to accept less than the amount owed on the mortgage. Short sales happen when there is not enough equity to sell and pay off the mortgage debt. Moreover, if the home is located in an area where home prices are on decline, then it may be sold off for less at a price that isn't enough to cover the loan balance.
A Short Sale is far less damaging than a foreclosure or deed-in-lieu. The FICO score is likely to drop down by 75-100 points if you do a short sale as compared to 250 points if you're on a deed-in-lieu or foreclosure. Often lenders allow for short sale if they believe that they'll suffer a small financial loss compared to that of foreclosure.
By doing a short sale, the borrower can avoid having a foreclosure on his credit report thereby preventing further drop-down on the credit score. Moreover, a short sale is faster and less expensive compared to foreclosure.
Foreclosure vs. Short Sale
|
Issue |
Foreclosure |
Successful Short Sale |
|
Future FHA Loan – Primary Residence |
A homeowner whose home goes into foreclosure will not qualify for an FHA home loan for 5 years. |
A homeowner whose home is sold in a short sale will qualify for an FHA loan after only 2 years. |
|
Future FHA Loan – |
An investor whose property goes into Foreclosure will not qualify for an FHA loan for 7 years. |
An investor whose property is sold in a short sale will qualify for an FHA loan after only 2 years. |
|
Future Loan by Any Mortgage Company |
On any future mortgage application, a buyer must answer YES to the question “Have you had a property foreclosed upon or given title or deed in lieu thereof in the last 7 years?” This will have an affect on future interest rates. |
There is no question about whether the buyer has ever done a short sale on mortgage applications. |
|
Credit Score |
The homeowner’s credit score can be lowered between 250-300 points as a result of a foreclosure. Generally this decrease will last more than 3 years. |
Only late payments on the homeowner’s mortgage will show up on a credit report. After a short sale the mortgage should be shown as ‘Paid’ or |
|
Credit History |
A foreclosure can stay on a homeowner’s credit history for 10 years or longer. |
There is no specified term to report a short sale on the homeowner’s credit history. The mortgage status is frequently reported as ‘Paid in full, settled’. |
|
Security Clearances |
It can be extremely difficult for an individual to get security clearance approval when applying for such jobs as police officer, military, CIA, Security. Having a foreclosure may affect job status. |
A short sale, on its own merits, may not challenge most security clearances. |
|
Current Employment |
Employers can and do check credit status of employees in sensitive positions. A foreclosure can adversely affect job security. |
A short sale is generally not reported n a credit report and should not pose a challenge to employment. |
|
Deficiency Judgment |
Depending on the type of loan at the time of foreclosure, some banks can go after more money from the homeowner to pay more of the mortgage deficit in a ‘deficiency judgment’. |
Depending on the type of loan at the time of short sale, the bank may try to get more money from the homeowner, but many times it is possible to negotiate no promissory note or deficiency judgment. |
|
Deficiency Judgment (amount) |
Once a property is foreclosed, the bank will try to sell it through a REALTOR® or in an auction. If the sale price is lower than the mortgage due, the bank will try to get a higher deficiency judgment from the homeowner. |
In a professionally negotiated short sale, the sale price should be close to actual market value. The proceeds to the bank would therefore result in a lower deficiency for the homeowner |
