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"Borrowers should beware of any organization that attempts to charge a fee for housing counseling or modification of a delinquent loan, especially if they require a fee in advance."
U.S. Department of the Treasury - Consumer QA
Foreclosure vs. Short Sale

Homeowner Consequences

Issue Foreclosure Successful Short Sale

Future Fannie Mae Loan - Primary Residence (effective May 21, 2008)

A homeowner who loses a home to Foreclosure is ineligible for a Fannie Mae backed mortgage for a period of 5 years.  A homeowner who successfully negotiates and closes a Short Sale will be eligible for a Fannie Mae backed mortgage after only 2 years.
Future Fannie Mae Loan - Non Primary (effective May 21, 2008)  An investor who allows a property to go to Foreclosure is ineligible for a Fannie Mae backed investment mortgage for a period of 7 years.  An investor who successfully negotiates and closes a Short Sale will be eligible for a Fannie Mae backed investment mortgage after only 2 years.
Future Loan with any Mortgage Company  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.  There is no similar declaration or question regarding a Short Sale.
 Credit Score  Score may be lowered anywhere from 250 to over 300 points. Typically will affect score for over 3 years. Only late payments on mortgage will show and after sale mortgage will be reported as paid or negotiated. This will lower the score as little as 50 points if all other payments are being made. A Short Sale's effect can be as brief as 12 to 18 months.
 Credit History  Foreclosure will remain as a public record on a person's credit history for 10 years or more.  Short Sale is not reported on a credit history. There is no specific reporting item for 'Short Sale'. The loan is typically reported 'paind in full, settled'.
 Security Clearances  Foreclosure is the most challenging issue against security clearance outside of a conviction of a serious misdemeanor or felony. If a client has a Foreclosure and is police officer, in the military, in the CIA, Security, or any other position that requires a security clearance in most cases clearance will be revoked and the position will be terminated.  A Short Sale on its own does not challenge most security clearances.
 Current Employment  Employers ahve the right and are actively checking the credit regularly of all employees who are in sensitive positions. A Foreclosure may be 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 can challenge employment.  A Short Sale is not reported on a credit report and is therefore not a challenge to employment.

 Deficiency Judgement


 In many states, depending on the kind of the loan, the bank has the right to pursue 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 judgement. In many successful Short Sales it is possible to convince the lender to give up this right as a part of the Short Sale.
 Deficiency Judgement (amount)  In a Foreclosure the home will have to go through an REO process if it does not sell auction. In most cases this will result in a lower sales price and longer time to sell in a declining market. This will result in a higher possible deficiency judgement.  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.


Legal stuff

 I'm not an attorney or CPA and each individual situation is different. This information is meant as a general guide but not a specific reccomendation for your exact situation.

Can I stay in my home during a short sale?

When you confront a problem you begin to solve it.

-Rudy Giuliani


A good article from the Wall Street Journal on the credit issues affecting a short sale vs. a foreclosure.

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation Q&A from the IRS

  • If I sell via a short sale or foreclosure will this result ina taxable event? Maybe

You can claim relief on your principal residence through IRS form 982

For more information on credit scores and how they are calculated, visit the "credit education center" at www.myfico.com






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