What’s The Difference Between A Short Sale & Foreclosure?

What is a Short Sale?

Today, many homeowners find themselves holding mortgages with balances much higher than the current market value of their homes. The industry term for this is being “underwater.” If you are in this position but have been able to make the payments on your mortgage and are in no danger of default, you may just be able to maintain your mortgage until the market recovers and your home’s value rises above the surface. If, however, you find yourself no longer able to make the payments and your lender is threatening foreclosure, a Short Sale may offer a way out that allows you to sell your property with a better financial outcome for your future home ownership opportunities.

How is a Short Sale Better Than a Foreclosure?

With a Short Sale, the lender agrees to let you sell the home for a price that is below the outstanding balance of the mortgage, but higher than what the bank might receive if it foreclosed and sold the property afterwards. Your lender may also agree to accept the proceeds of the short sale as payment in full.

Here are a few benefits for doing a short sale: 

• You control the sale, not the lender. 
• You won’t be branded with the "F" word, foreclosure. 
• Even if your mortgage is current you can do a short sale. 
• Your short sale will be handled like any other home sale.
• You can stay in your home while you sell.

How Soon Can You Buy Again After a Short Sale?

If your payments have never fallen behind 30 days late and the lender does not require that you pay back the loan, you may be able to qualify for a new loan immediately through Fannie Mae or FHA.  

If your payments are in arrears yet a short sale is granted by your lender, you may qualify to buy another home with a Fannie-Mae backed mortgage within two years, regardless of whether the home is your primary residence. The wait for FHA is 3 years. 

How Soon Can You Buy Again After a Foreclosure?

The wait is generally 7 years but with certain restrictions, you may be eligible to buy another home in 5 years if the home was your primary residence.

If you are an investor and do not occupy the home, the wait to buy with a Fannie Mae insured loan is 7 years. 

What are the Affects on Credit After a Short Sale?

A short sale may be considered to be a black mark on your credit even though credit bureaus do not show the word "short sale" on your credit report. Ideally, you want the mortgage reported as “Paid as agreed.” Otherwise, the lender may report, "paid in full for less than agreed" or "settled for less," among other categories. Such negative reports may drop scores from 50 points to 130 points. 

What are the Affects on Credit After a Foreclosure?

Many sources report FICO score drops from 200 to 400 points after a foreclosure. Generally this credit score will remain on your credit report as a public record for 7 to 10 years. 

Are There Deficiency Judgments After a Foreclosure?

Banks are unwilling to negotiate deficiency judgments with the homeowner after a foreclosure. In California, for example, according to the California Association of REALTORS, a deficiency judgment may be filed regarding a hard-money loan if the lender forecloses under a judicial foreclosure versus a trustee sale or if the second loan is a hard money loan and the sale takes place as a trustee's sale. 

What About Loan Application Questions After a Short Sale?

Loan applications do not ask questions about a short sale. Any questions about the sale can be answered as a normal sale.

What About Loan Application Questions After a Foreclosure?

You are required to answer the question: "Have you ever had a property foreclosed upon or given a deed-in-lieu thereof in the past 7 years." If the bank sees you have had a foreclosure, your loan most likely will be denied. If you fail to report the foreclosure, you may be committing mortgage fraud. 

What Is the Length of Time to Move After a Short Sale?

If you've had a foreclosure notice filed, you may be able to postpone that action while the bank considers your short sale. The wait for short sale approval can be from 2 to 3 months, or longer. 

What Is the Length of Time to Move After a Foreclosure?

Unless prior arrangements have been made, the bank may want you to immediately vacate the property and can commence eviction proceedings. 

What Is the Taxation After a Short Sale?

A personal residence is exempt from mortgage debt relief until the end of 2012 on a federal level as well as in the State of Washington.

What Is the Taxation After a Foreclosure?

Same as with a short sale, except that some lenders may immediately send out 1099s, even if the owner is exempt.