Foreclosures vs. Short Sales

They say a picture is worth a thousand words. So you have to figure a good chart is worth at least 500 words. That’s why this chart is so handy, because at a glance you can see the major differences between a foreclosure and a short sale:

 

Foreclosure

Short Sale

Credit Impact Estimated 200 to 300+ points off your credit score. Estimated 100 to 150 points off your credit score if no deficiency judgment.
Credit score is important; however, lenders, employers, and other companies also look at the content of the credit report. The word “Foreclosure” on the report reflects poorly against you. Short sale appears as settled debt. It shows you made an effort to resolve the debt and came to an agreement with the lender.
Takes up to three years to start bringing your credit rating up. In 12-18 months your credit rating can be good (with proper care).
Foreclosures are always reported. They can be on your public record for seven to 10 years. There is no standard for reporting short sales. They can be reported as “settlement short of full payment.” Some lenders do not bother reporting short sales.
Financial Impact Second liens are wiped out; however, the lien holder can file a deficiency judgment against you. A well-negotiated short sale will obtain a payoff of the second lien with no deficiency judgment.
In most cases you will not have to pay tax on forgiven debt if the foreclosed home was your principal residence. In most cases you will not have to pay tax on forgiven debt if the short sale home was your principal residence.
Sales Price and Impact on Neighborhood Foreclosed homes typically sell for much less than a short sale. This can also result in a significantly greater deficiency balance owed. A short sale will typically get the highest and best offer. This will reduce the deficiency balance and improves the chance of a full settlement with the lender.
Can You Get Money? No Up to a $3,000 relocation credit can be awarded to the seller if processed through HAFA. FHA also offers up to $1,000 as a short sale incentive.
Time it Takes Lenders usually begin foreclosure after 90 days of delinquency. In Texas the foreclosure process can be completed in as little as three weeks. On average it takes three to four months to complete a short sale. Most lenders will suspend foreclosure during the short sale process.
There is no good time for a foreclosure. The best time to start a short sale is after you have missed the second payment and you are certain you cannot catch up payments.
After the foreclosure the bank can file for eviction and have you thrown out of the house. Most lenders ask that you stay in the house during the short sale process so the house is secured and maintained.
Applying for a job Many potential employers pull a credit report on applicants. A foreclosure on your credit report can suggest you are irresponsible. A short sale on your credit report typically appears as “settlement short of full payment” or “settled debt.” It shows you and the bank agreed on a final payoff.
Security Clearance For jobs that require security clearance (e.g. police, military) a foreclosure could cause a security clearance to be denied. No effect.
Getting Another Mortgage Freddie Mac or Fannie Mae require five to seven years before you are eligible for a mortgage. Freddie Mac or Fannie Mae allow eligibility for a mortgage in two years. If you were not delinquent it can be immediate.
Decisions The lender makes all the decisions for you, without your best interests in mind. You have more control and make more of the decisions.

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