When foreclosure is imminent or proceedings have already been started by your lender, you may think that there are no options. However, for many homeowners, a short sale is a very viable option. Understanding the differences between short sales and foreclosures can help to make the time-consuming process worth the effort.
- How Credit Reports are Affected by Short Sales and Foreclosures. Generally, a short sale is not reported negatively to the credit bureaus, but is reported as “paid in full” on your credit history. If it is reported as negotiated, it may remain on your history for up to 18 months. A foreclosure is a negative hit on your credit history that will remain there for at least ten years, and it is also a matter as public record.
- Immediate Affects on Credit Scores. A foreclosure will generally reduce one’s credit score by a minimum of 250 points, with 300 points being quite common. This can affect your credit scores for more than 36 months. A short sale will be reported as negotiated or paid in full, and will usually only drop your score 50 points or so. A short sale should only affect your credit score for about 12 to 18 months.
- How Future Mortgage Loans May Be Affected. If you have been foreclosed on, you will have to include that when you fill out a standard mortgage loan application if it has been fewer than seven years since the foreclosure. Standard applications do not require you to declare whether you have had a short sale. If you are working with a mortgage backed by Fannie Mae, you must wait at least five years if you have been through a foreclosure and two years if you had a short sale.
- Differences Between Future Mortgage Loan Interest Rates. When you have had your home foreclosed on by a lender, you may be able to get a loan as soon as two years after the incident, but it will be at a much higher interest rate than the current standard rate. It could take up to seven years before you can get a mortgage at an acceptable rate. When a homeowner has had a short sale, reasonable rates may be available from mortgage lenders within two years or less. The guidelines set forth by Fannie Mae allow a homeowner who has had a short sale to apply for new mortgage loans without a waiting period if there are no late payments of 60 days or more and the payments were kept current.
- The Mortgage Lender Decides Whether they will Accept a Short Sale over a Foreclosure. The decision to accept a short sale or to proceed with a foreclosure is ultimately up to the mortgage lender. Even though in most cases a short sale is more beneficial to the homeowner because of the credit consequences, a lender is not required to agree to that option. If a homeowner wants to do a short sale, he or she must convince the lender that the amount received from the short sale will be a fair market value and that it will cost the lender more to follow through with the foreclosure. A borrower must also have evidence that they cannot pay the mortgage in any other way because of financial hardship. If a lender believes that they will be better off financially by completing the foreclosure process, they are not likely to accept a short sale.
- The Lender’s Rights Regarding Deficiency Judgments. When a foreclosure has happened, the lender can have a deficiency judgment filed and come after you to collect the difference between what you owed them and the amount the home was eventually sold for. Because foreclosed homes must either be sold at auction or go through a Real Estate Owned (REO) sale, the amount received by the lender may not be very high, which means the deficiency judgment could be fairly high. With a short sale, many lenders will waive their rights to pursue a deficiency. If they do not waive the right, the amount they go after you for will usually be much less than with a foreclosure because the sales price will have been higher.
- Impact on Employment. Because a short sale has little negative impact on your credit report, it should not affect your employment. However, because many employers take credit reports into consideration when hiring, a foreclosure could possibly cost you future employment.