Monday, April 26, 2010

Strategic Default/Foreclosure VS. Short Sale

Strategic Default/Foreclosure VS. Short Sale

What are the Homeowner Consequences in each?

Most persons losing their homes to foreclosures
do not realize there are better options available to them today.

Do you know anyone that could benefit from this information?
Please have them call me or visit my
Short Sale and Foreclosure Avoidance Web Site at
for more information & free reports.

Future Fannie Mae or Freddie Mac Loan - Primary Residence

A homeowner who loses a home to Foreclosure will not be eligible for a Fannie Mae, Freddie Mac, VA or Conventional Mortgage for a period of 5 years.

Successful Short Sale
A homeowner who successfully negotiates and then closes a short sale WITHOUT BEING LATE on any obligation may be eligible for a Fannie Mae backed mortgage after only 2 years and a conventional or FHA loan immediatly. Several conditions apply.

VA loans whether late or not, and FHA loans with late payments are a 3 year wait.

Conventional loans are a 2 year wait if there are late payments.

Future Fannie Mae Loan – Non-Primary Residence/Investor

An Investor who allows a property to go to Foreclosure will not be eligible for a Fannie Mae backed investment mortgage for a period of 7 years.

Successful Short Sale
An investor who successful negotiates and closes a short sale may be eligible for a Fannie Mae backed investment mortgage after only 2 years.

Conventional investor loans will take 5 to 7 years depending on late payments.


Future loan with any Mortgage Company

On any future 1003 application, a prospective borrower will always 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 deed in lieu thereof in the last 7 years?" this will affect your future interest rates.

Successful Short Sale
Does not apply on a short sale.


Credit Score - FICO Score

May be lowered anywhere from 250 to 300 points or more.
Typically this will affect the credit score for over 3 years.

Successful Short Sale

Only the late payments on loan will show and after the sale. The loan will be reported as paid as agreed or negotiated or settled. This will lower the credit score as little as 50 points provided all other payments are being made on time. A short sale's affect on credit 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 at least 10 years.

Successful Short Sale
Short sale is not reported on your credit history. There is no specific reporting item for 'short sale'. The loan is typically reported “paid in full, settled” or as “paid as negotiated”.


Security Clearances

Foreclosure is the most challenging issue against your security clearance outside of a conviction of a serious misdemeanor or felony. If a person has a foreclosure and is a police officer, in the military, in the CIA, Security, or any other job that requires a security clearance,  the clearance will be revoked and position will be terminated, in almost all cases

Successful Short Sale
A Short Sale by itself, does not challenge most security clearances.


Current Employment

Employers have the right to, and are actively checking, the credit regularly of all employees who are in sensitive positions. A foreclosure in many cases can be grounds for termination or immediate reassignment.

Successful Short Sale
A short sale is not reported on the credit report and therefore is not a challenge to employment.


Future Employment

Many employers are requiring credit checks on job applicants. A foreclosure is one of the most detrimental credit items an applicant can have and in most cases will be a challenge to employment.

Successful Short Sale
A short sale is not reported on a credit report and is therefore is not a challenge to employment.

Deficiency Judgment

In California, there is no deficiency judgment for purchase money loans for 1-4 units.

For non-purchase money loans,  the lender has the right to pursuit a deficiency judgment against the homeowner in some cases.
Successful Short Sale
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. If you are approved under HAFA, there can be no deficiency judgment.

Strategic Default/Foreclosure or Short Sale. 
Which one is better for you?

See my Short Sale and Foreclosure Avoidance Web Site at

for more information and free reports.

This article was revised 5/3/2010, after the new HAFA guidelines came out.

As always, this article is for informational purposes only and is not legal or tax advise.  You should contact the appropriate professional to see how a Strategic Default/Foreclosure or a Short Sale will affect you.


Dennis Smith, ABR, SRES, e-PRO, CDPE, Realtor® DRE# 00476662
Certified Distressed Property Expert

Donna "Sunshine" Smith, SFR, Realtor® DRE# 01249837
Short Sale, Foreclosure Resource Certified

RE/MAX By-the-Sea
Formerly with Taylor Place Real Estate
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