Short Sale vs Foreclosure

 

Definitions:

Foreclosure: is a legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage. Also known as a repossession of property, when the lender takes over the property.

Short Sale: is when a homeowner is trying to sell for less than the amount owed on the loan, this type of transaction requires bank approval and there are certain guidelines and pre-requisites a bank will ask for prior to short sale approval.

 


Fannie Mae Waiting Period Table

Derogatory Event Fannie Mae Waiting Period Requirements Waiting Period with Extenuating Circumstances
Short Sale

2 Years - 80% maximum LTV ratios

4 Years - 90% maximum LTV ratios

7 Years - LTV ratios per the Lender Eligibility Matrix

2 Years - 90% maximum LTV ratios
Foreclosure 7 Years

3 Years

  • Additional requirements after 3 years up to 7 years
  • 90% maximum LTV ratios
  • Purchase, principal residence
Issue Short Sale Foreclosure

Future Fannie Mae Loan

(Primary Residence)

A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae-backed mortgage within 2 years (see above for LTV ratios). A homeowner who loses a home to foreclosure is ineligible for a Fannie Mae-backed mortgage for a period up to 7 years with some exceptions based on extenuating circumstances. See: efanniemae.com

Future Fannie Mae Loan

(non Primary)

An investor who successfully negotiates and closes a short sale will be eligible for a Fannie Mae-backed investment mortgage within 2 years (see above for LTV ratios). An investor who loses a home to foreclosure is ineligible for a Fannie Mae-backed mortgage for a period up to 7 years with some exceptions based on extenuating circumstances. See: efanniemae.com
Future Loan with any Mortgage Company There is no similar declaration or question regarding a short sale. FHA - If current at the close of short sale, a homeowner may apply for an FHA loan immediately. If homeowner is late before close of short sale closing, will be eligible for FHA loan after 3 years. On any future 1003 application, a prospective borrower will have 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 will affect future rates.
Credit History Short Sale is not reported on a person's credit history. Foreclosure will damage a person's credit history for 10 years or more.
Credit Score Can lower a person's score as little as 50 points if all other payments are being made.  Short sale's affect can last as long as 12 to 18 months. A person's score may be lowered anywhere from 250 to over 300 points. Typically will affect score for over 3 years.
Control You are in control of the sale. Your home will be handle like any other home sale. The Bank has control of your home.
Purchase Short sale lets you purchase a home after 2 years. You have to wait 5 to 7 years to be able to purchase another home.
Security Clearances Short Sale, on its own, does not challenge most 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 will be revoked and position could be terminated.
Current Employment Short Sale is not reported on a credit report and is, therefore, not a challenge to employment. Employers have the right and are actively checking the credit regularly of all employees who are in sensitive positions. A foreclosure, in some cases, can be grounds for immediate reassignment or termination.
Future Employment Short sale is not reported on a credit report and is therefore not a challenge to 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.
Deficiency Judgment In some successful short sales it is possible to convince the lender to give up the right to pursuit a deficiency judgment against the homeowner. In 100% of foreclosures (except in those states where there is no deficiency) the bank has the right to pursue a deficiency judgment.
Deficiency Judgment (Amount) In a properly 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.  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.