What is the Difference Between a Foreclosure and a Short Sale?

What is the Difference Between a Foreclosure and a Short Sale?

Question
FORECLOSURE SHORT SALE

When can I buy another home?

When you lose your property to foreclosure, you are ineligible for a Fannie Mae backed mortgage for a period of 5 years. (effective May 21, 2008, visit www.fanniemaie.gov) Short sale your home and you will be eligible for a Fannie Mae backed mortgage after only 2 years. (effective May 21, 2008, visit www.fanniemae.gov)

When can I buy another vacation home or investment property? Same as above except Fannie Mae won’t look at you for another investment loan for 7 years! (effective May 21, 2008, visit www.fanniemae.gov) Same as above in a Short Sale! Fannie Mae will consider you for an investment loan in 2 years.

What about other types of conventional financing with other mortgage companies? You will have to answer “YES” to the standard loan application form used by ALL lenders. For example, “have you had property foreclosed upon, or given title or deed in lieu thereof?” If you get approved you can expect to pay a REALLY high interest rate. Short Sales are the “New Frontier”. There are a lot of opinions but no definite answers from any of the big lenders that had an answer. We know there will be an impact but the general consensus… It won’t be nearly as bad as a foreclosure!

Credit Score Score may be lowered anywhere from 250 to over 300 points. It will remain on your credit report for 10 years. Typically the impact to your ability to obtain credit will begin to “soften” after 3-4 years with higher interest rates being the “punishment”. Only late payments on the mortgage while the sale is being negotiated will show. The mortgage (or “account”) will be reported as paid or settled. If you are still making current payments on all other accounts, this may lower the score as little as 50 points!

Credit History Foreclosure will remain as a public record on a person’s credit history for 10 years or more. A short sale is not reported on a credit history. There is no specific reporting item for “short sale”. The loan is typically reported as “paid in full”, “satisfaction of debt of debt in full” or “paid in full for less than owed”.

Security Clearances Foreclosure is the most challenging issue against a security clearance, outside of a conviction for a serious misdemeanor or felony. If a client has a foreclosure and is a police officer, in the military, a government employee, a security officer, or any position that requires a security clearance, in almost all cases, clearance will be revoked and position terminated. A short sale, on its own, does not challenge most security clearances. But in trying to research and determine what future negative impact it may have… you will learn that the government just doesn’t like to make guesses.

Current Employment Employers have the right, and are actively and regularly checking the credit of all employees who are in sensitive positions. A foreclosure, in many cases, is grounds for immediate reassignment or termination. A short sale is not reported on a credit report and is, 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 is, therefore, not a challenge to employment.

Deficiency Judgment Most states, depending on the kind of loan, allow for deficiency judgments. Almost 100% of the time the junior lien holders have the right to pursue a deficiency judgment. Depending on the type of loan some lenders who accept a short sale may be able to pursue a borrower for a deficiency judgment. Experienced short sale negotiators always go for full satisfaction of debt or loan paid in full… and you have to fight for it!

Deficiency Judgment Amount In a foreclosure, the home will have to go through a REO process if it does not sell at auction. In most cases, this will result in a lower sales price, and a longer time to sell in a declining market. Plus legal fees, repairs, evictions, etc…. You tend to have a higher amount you’ll end up owing and the junior lien holders tend to pursue the full deficiency. This can also result in a judgment against your name. Even sold as a short sale for a lower “wholesale” price, if a deficiency judgment is demanded it would most probably be less than a foreclosure and negotiated to pennies on the dollar. There are new laws such as the Home Affordable Foreclosure Alternative Program, otherwise known as HAFA, that are creating incentives and encouraging lenders and borrowers to pursue short sale rather than foreclosure. Plus… there are tax benefits to proving your “insolvency”. Consult your accountant!

Tax Liability Because in a foreclosure auction the deficiency is not “forgiven”, it is not likely a tax would be collected on that deficiency. Most states allow for deficiency judgments. Almost 100% of the time the lender has the right to pursue a deficiency judgment. Contact your CPA or Tax Attorney. Presently through December 31st, 2012, if you owned and occupied your home as your principal residence for two years or more, then you may be exempt from recognizing as income the difference between what the bank accepts to clear your mortgage or deed of trust and what is actually owed to the bank. Contact your CPA or Tax Attorney.

Time In Home In a foreclosure the purchaser at a trustee sale is entitled possession of the property on the 20th day following the sale. In a short sale, it is typical for a lender to postpone an auction of a property actively listed on the open market and with a bona-fide offer to allow for time beyond the foreclosure date for the transaction to close.

Real Estate Agent Commissions Commissions are not applicable when a property is sold at auction or goes back to the foreclosing lender. Commissions are a built expense that the lender incurs in an approved short sale and therefore not an out-of-pocket expense to the seller. Commissions are disbursed upon a successful close of a transaction.

DISCLAIMER! All information gathered was verified to the best of our ability as of May 1, 2009. You may confirm the majority of this information by contacting your local HUD office or visiting; www.HUD.gov, www.Fanniemae.gov, www.TSA.gov and contacting all three credit reporting agencies. This is not a replacement for professional legal advise, but a simple discussion guide presenting some of the options available.

Email me for more infomation:

Sam@SamRangel.com

What is the Difference Between a Foreclosure and a Short Sale?
Question	FORECLOSURE	SHORT SALE
When can I buy another home?	When you lose your property to foreclosure, you are ineligible for a Fannie Mae backed mortgage for a period of 5 years. (effective May 21, 2008, visit www.fanniemaie.gov)	Short sale your home and you will be eligible for a Fannie Mae backed mortgage after only 2 years. (effective May 21, 2008, visit www.fanniemae.gov)
When can I buy another vacation home or investment property?	Same as above except Fannie Mae won’t look at you for another investment loan for 7 years! (effective May 21, 2008, visit www.fanniemae.gov)	Same as above in a Short Sale! Fannie Mae will consider you for an investment loan in 2 years.
What about other types of conventional financing with other mortgage companies?	You will have to answer “YES” to the standard loan application form used by ALL lenders. For example, “have you had property foreclosed upon, or given title or deed in lieu thereof?” If you get approved you can expect to pay a REALLY high interest rate.	Short Sales are the “New Frontier”. There are a lot of opinions but no definite answers from any of the big lenders that had an answer. We know there will be an impact but the general consensus… It won’t be nearly as bad as a foreclosure!
Credit Score	Score may be lowered anywhere from 250 to over 300 points. It will remain on your credit report for 10 years. Typically the impact to your ability to obtain credit will begin to “soften” after 3-4 years with higher interest rates being the “punishment”.	Only late payments on the mortgage while the sale is being negotiated will show. The mortgage (or “account”) will be reported as paid or settled. If you are still making current payments on all other accounts, this may lower the score as little as 50 points!
Credit History	Foreclosure will remain as a public record on a person’s credit history for 10 years or more.	A short sale is not reported on a credit history. There is no specific reporting item for “short sale”. The loan is typically reported as “paid in full”, “satisfaction of debt of debt in full” or “paid in full for less than owed”.
Security Clearances	Foreclosure is the most challenging issue against a security clearance, outside of a conviction for a serious misdemeanor or felony. If a client has a foreclosure and is a police officer, in the military, a government employee, a security officer, or any position that requires a security clearance, in almost all cases, clearance will be revoked and position terminated.	A short sale, on its own, does not challenge most security clearances. But in trying to research and determine what future negative impact it may have… you will learn that the government just doesn’t like to make guesses.
Current Employment	Employers have the right, and are actively and regularly checking the credit of all employees who are in sensitive positions. A foreclosure, in many cases, is grounds for immediate reassignment or termination.	A short sale is not reported on a credit report and is, 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 is, therefore, not a challenge to employment.
Deficiency Judgment	Most states, depending on the kind of loan, allow for deficiency judgments. Almost 100% of the time the junior lien holders have the right to pursue a deficiency judgment.	Depending on the type of loan some lenders who accept a short sale may be able to pursue a borrower for a deficiency judgment. Experienced short sale negotiators always go for full satisfaction of debt or loan paid in full… and you have to fight for it!

Deficiency Judgment Amount	In a foreclosure, the home will have to go through a REO process if it does not sell at auction. In most cases, this will result in a lower sales price, and a longer time to sell in a declining market. Plus legal fees, repairs, evictions, etc…. You tend to have a higher amount you’ll end up owing and the junior lien holders tend to pursue the full deficiency. This can also result in a judgment against your name.	Even sold as a short sale for a lower “wholesale” price, if a deficiency judgment is demanded it would most probably be less than a foreclosure and negotiated to pennies on the dollar. There are new laws such as the Home Affordable Foreclosure Alternative Program, otherwise known as HAFA, that are creating incentives and encouraging lenders and borrowers to pursue short sale rather than foreclosure. Plus… there are tax benefits to proving your “insolvency”. Consult your accountant!
Tax Liability	Because in a foreclosure auction the deficiency is not “forgiven”, it is not likely a tax would be collected on that deficiency. Most states allow for deficiency judgments. Almost 100% of the time the lender has the right to pursue a deficiency judgment. Contact your CPA or Tax Attorney.	Presently through December 31st, 2012, if you owned and occupied your home as your principal residence for two years or more, then you may be exempt from recognizing as income the difference between what the bank accepts to clear your mortgage or deed of trust and what is actually owed to the bank. Contact your CPA or Tax Attorney.
Time In Home	In a foreclosure the purchaser at a trustee sale is entitled possession of the property on the 20th day following the sale.	In a short sale, it is typical for a lender to postpone an auction of a property actively listed on the open market and with a bona-fide offer to allow for time beyond the foreclosure date for the transaction to close.
Real Estate Agent Commissions	Commissions are not applicable when a property is sold at auction or goes back to the foreclosing lender.	Commissions are a built expense that the lender incurs in an approved short sale and therefore not an out-of-pocket expense to the seller. Commissions are disbursed upon a successful close of a transaction.
DISCLAIMER! All information gathered was verified to the best of our ability as of May 1, 2009. You may confirm the majority of this information by contacting your local HUD office or visiting; www.HUD.gov, www.Fanniemae.gov, www.TSA.gov and contacting all three credit reporting agencies. This is not a replacement for professional legal advise, but a simple discussion guide presenting some of the options available.