Foreclosure defined:  A foreclosure is a legal process by which a borrower becomes deliquent with their mortgage payments and the lending bank reclaims the property.
 
Options for Distressed Homeowners:
  • Refinance
  • Sell and bring cash to closing
  • Lender workout
  • Short sale
  • Deed in lieu of foreclosure
  • Foreclosure
  • Do nothing and walk away
There are several government and county level programs to help guide distressed homeowners through these options.  Click on the following links for more information:
 
U.S. Dept of Housing and Urban Development:  www.hud.gov/foreclsoure
AHOME - Arlington Home Ownership Made Easier, Inc.: http://www.ahomeinc.org/
Making Home Affordable: www.makinghomeaffordable.gov
Loan Modification Programs: www.hopenow.com
 
Short sale defined: A short sale occurs when the seller owes more money on the loan than the house will sell for on the open market and the lender accepts less than what is owed.
 
Sellers who want lenders to agree to a short sale must qualify. These qualifications include the following:
  1. The market value of your home has dropped
  2. You must be behind (or at risk of falling behind) on your mortgage payments
  3. There must be a valid hardship (i.e., job loss, illness and medical costs, divorce, death of a spouse, natural disaster)
  4. You must not have any other assets that could be sold to help pay for the mortgage
Benefits of a short sale versus foreclosure:
  • The homeowner's credit score will be damaged, but not as much with a short sale versus a foreclosure
  • Lessens the impact a foreclosure can have on a surrounding community
Always consult financial, tax, and legal professionals when considering a short sale.
 
There are several government and county level programs to help guide distressed homeowners through these options.  Click on the following links for more information:
 
U.S. Dept of Housing and Urban Development:  www.hud.gov/foreclsoure
AHOME - Arlington Home Ownership Made Easier, Inc.: http://www.ahomeinc.org/
Making Home Affordable: www.makinghomeaffordable.gov
Loan Modification Programs: www.hopenow.com

FORECLOSURE VS. SHORT SALE
HOMEOWNER CONSEQUENCES
ISSUE
FORECLOSURE
SUCCESSFUL SHORT SALE
Future Fannie Mae Loan-
Primary Residence
(effective May 21st, 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 affect 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 ‘paid in full, settled’.
Security Clearances
Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. If a client has a foreclosure and is a police officer, in the military, in the CIA, Security, or any other position that requires a security clearance in almost all cases clearance will be revoked and position will be terminated.
A short Sale on its own does not challenge most security clearances.
Current Employment
Employers have the right and are actively checking the credit regularly of all employees who are in sensitive positions. A foreclosure in many cases is ground 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 in 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 (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 impossible to convince the lender to give up the right to pursuit a deficiency judgment against homeowner.
Deficiency Judgment
(amount)
In a foreclosure the home will have to go through an REO process if it does not sell at auction. In most cases this will result in a lower sales price and longer time to sale in a declining market. This will result in a higher possible deficiency judgment.
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.