Thursday, August 11, 2011

Foreclosure Versus Short Sale. How Each Affect Your Credit.

By Troy Corman,

The following is a quick reference and general guide for those considering a "short sale". A short sale is defined as a lender (bank) accepting less than is owed on the current owner's mortgage loan. A short sale isn't ideal for your credit report but it is much better than having a foreclosure on your credit history. We'll compare the two scenarios below.

Fannie Mae Loan - On a primary residence, a homeowner who loses a home to foreclosure is ineligible for a Fannie Mae-backed mortgage for 5 years. A homeowner who successfully negotiates and closes a short sale will be eligible after only 2 years.

Fannie Mae Loan (non-primary residence) - A foreclosure would prevent the buyer, or investor, from using a Fannie Mae-backed investment mortgage for 7 years. An investor who successfully negotiates and closes a short sale will be eligible after only 2 years.

Credit Score
- On a recorded foreclosure, your credit score will be lowered from 250 to more than 300 points. Typically, it will affect credit score for over 3 years. On a short sale, the mortgage is normally reported as "paid as agreed", "paid as negotiated", or "settled". Only late payments on the mortgage will show. A short sale can lower your scores as little as 50 points if all other payments are made. A short sale's effect can be as brief as 12 to 18 months.

Credit History - Foreclosure will remain as a public record and on a person's credit history for 10 years or more. A short sale is not reported on your credit history.

Security Clearance - Foreclosure is the most challenging issue against a security clearance outside of a serious misdemeanor or felony conviction. Positions in the police force, military, CIA and security fields usually result in termination. A short sale, on it's own, does not challenge most security clearances.

Current Employment - Employers have the right and are actively checking the credit of all employees who are in sensitive positions. In many cases, a foreclosure is reason for immediate reassignment or termination. A short sale is not reported on a credit report, and is therefore, usually not a challenge to employment.

Future Employment - Many employers are requiring credit checks on all job applicants. A foreclosure can challenge employment. A short sale is not reported on a credit report and therefore, should not challenge future employment.

Deficiency Judgment - In 100% of foreclosures (except in those states where there is no deficiency), the bank has the right to pursue a deficiency judgment. In some successful short sales, it is possible to convince the lender to give up the right to pursue a deficiency judgment.

The preceding information is a general guide and is not legal advice. If you're in dire straits, please consult real estate or legal counsel as soon as possible. Best of luck!

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