Future Consequences of a Foreclosure vs. a Short Sale
When making the decision to walk away from your home (whether a strategic walk-away or hardship), the first question always asked is; why bother going thru a short sale, rather than just letting the bank foreclose? Although to most a short sale may be the obvious choice, the answer may vary depending on a person’s individual circumstance. However before making the decision, you should always take into account all the future ramifications of your decision. Here is a simple comparison chart of the different ways a foreclosure vs. a short sale will affect you in the years following your decision:
Future Loans – Primary Residences
| Loan | Foreclosure | Short Sale |
| Fannie Mae | Ineligible for a mortgage for 5 years after the foreclosure date | eligible for a Mortgage after only 2 Years from the closing date of the short sale |
| FHA Loan – Delinquent | Ineligible for a mortgage for 5 years after the foreclosure date | eligible for a Mortgage after only 3 years from the date the FHA insurance claim is paid to the lender – not the date of the closing date |
| FHA Loan – Current | Ineligible for a mortgage for 5 years after the foreclosure date | No Wait period – borrower must be current on all obligations, including installment debt. |
| VA Loan – Delinquent | Ineligible for a mortgage for 5 years after the foreclosure date | eligible for a Mortgage after only 3 Years from the closing date of the short sale |
| VA Loan – Current | Ineligible for a mortgage for 5 years after the foreclosure date | eligible for a Mortgage after only 3 Years from the closing date of the short sale |
| Conventional Loan – Delinquent | Ineligible for a mortgage for 5 years after the foreclosure date | eligible for a Mortgage after only 2 Years from the closing date of the short sale |
| Conventional Loan – Current | A borrower will have to answer Yes on an application for 7 years after a foreclosure or deed-in-lieu. This will effect interest rates | No Wait period – borrower must be current on all obligations, including installment debt. |
Future Loans – Non-Primary Residences
| Loan | Foreclosure | Short Sale |
| Fannie Mae | Ineligible for a mortgage for 7 years after the foreclosure date | eligible for a Mortgage after only 2 Years from the closing date of the short sale |
| Conventional Loan– Delinquent | A borrower will have to answer Yes on an application for 7 years after a foreclosure or deed-in-lieu. This will effect interest rates | eligible for a Mortgage after only 7 Years from the closing date of the short sale |
| Conventional Loan – Current | A borrower will have to answer Yes on an application for 7 years after a foreclosure or deed-in-lieu. This will effect interest rates | eligible for a Mortgage after only 5 Years from the closing date of the short sale |
Additional Future Impacts
| Issue | Foreclosure | Successful Short Sale |
| Credit Score | Score may be reduced 250 – over 300 points. Will typically affect score for over 3 years. | Only late payments will show on credit. Can lower score as little as 50 points if all other payments are being made. Can effect score as briefly as 12 – 18 months |
| Credit History | Foreclosure will remain on credit report for 10 years or more. | A short sale is not reported on a person’s credit. Will be reported as Paid in full, settled, or paid as negotiated. |
| Security Clearances | Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. If a person who is a police officer, in the military, in the CIA, in the FBI, Security officer, or any other position that requires a security clearance, clearance will be revoked and the position terminated in almost all cases | A short sale does not challenge security clearances |
| Current Employment | Employers have the right and are actively checking credit regularly of employees who are in sensitive positions. A foreclosure may be grounds for 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 for job applicants. Foreclosure is one of the most detrimental credit items one can have on a credit report, and will remain there for 10 years of more. Most cases will challenge employment | A short sale is not reported on a credit report and is therefore not a challenge to employment |
| Deficiency Judgment | In 100% of foreclosures (in states where applicable, like NV), the bank has the right to pursue a deficiency judgment. | In many cases, the lender agrees to give up the right to pursuit a deficiency judgment in order to allow the short sale. |
| Deficiency Judgment (amount) | In a foreclosure, the home will have to go through an auction and in many cases an REO process. This will typically result in a lower sales price and additional expenses will be added to the unpaid balance. This may result in a higher deficiency judgment. | If the lender did not waive their right to a deficiency judgment, the home is typically sold at market price with no additional expenses to the lender. This will result in a lower deficiency judgment than a foreclosure. |
| Tax Consequence
(may qualify under the mortgage debt forgiveness act of 2007) |
Will receive a 1099 for the amount of the loan forgiven, and may need to pay taxes on this amount. This amount may include any additional expenses applied during the foreclosure, auction, and REO process. If sold at auction for a lower sales price, the amount being forgiven (and subsequent tax liability) will be greater. | The home is typically sold at market price with no additional expenses to the lender. This will result in a lower amount being forgiven, and therefore a lower tax consequence. |
Should you have any questions or need further information, please don’t hesitate to contact me, (775) 220-1630
Or visit my website at www.SellingHomesinReno.com
Joshua Talayka
NAR designated: Short Sale & Foreclosure Resource
Chase International
Jtalayka@chaseinternational.com
Office: 775 850 5900
Toll Free: 877 922 5900
Cell: 775 220 1630
Fax: 775 850 5901
985 Damonte Ranch Pkwy, Ste. 110
Reno, Nevada (NV) 89521
Legal disclaimer: I am not an attorney. The information contained in this article/blog is intended to provide general information on the subject and not to provide any legal representation or legal advice in any means. You should not act upon this or any information without first seeking independent legal counsel.
Source of Content: First Centennial Title Co. of Nevada
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