Foreclosure VS Short Sale You Need To Know The Difference!

Issue Foreclosure Short Sale Future Fannie Mae Loan - Primary Residence 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 only after 2 years. Future Fannie Mae Loan - Non Primary 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 mortgage application, a prospective borrower will have to answer " YES" to question C in Section VIII  that asks “Have you had a property foreclosed upon or given title or deed in lieu thereof in the last 7 years ?”.  This answer will affect future interest rates. There are no similar declarations or questions  regarding a short sale on the mortgage application. 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 a 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. There is no specific reporting item on a credit report 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.  Officers in the military may be adversely affected by a short sale. 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  as such 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 possible to convince the lender to give up the right to pursue a deficiency judgment against the 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 closer to fair market value and in almost all cases will be better than an REO sale resulting in a lower deficiency.

 

Foreclosures versus Short Sales

We get this question all the time - what is the difference between a foreclosure and a short sale? And which is the better deal? 

A foreclosure or REO (which stands for Real Estate Owned) is a property that the bank has already taken back through the foreclosure process. The owner has moved out and the bank holds legal title to the property. In some states the previous owner still has a “redemption period” to get the home back from the bank. But in most cases foreclosures are final and the bank can turn around and sell them right away. An offer on a foreclosure property can take anywhere from one day to two weeks to be accepted by the bank and usually 30 to 45 days from acceptance to close. 

A short sale or pre-foreclosure, on the other hand, is where the owner owes more money on the property than it is worth and is trying to sell it for less than the amount owed. An offer to purchase may be approved by the owner (who is not going to walk out with any cash anyway), but the contract is still subject to final approval by the bank (or banks if there is more than one mortgage on the property). The bank has to agree to take less than what they are owed. Once a bona fide offer is received, the seller is required to write a hardship letter stating why they should be eligible to do a short sale. They must also provide bank statements, paycheck stubs, and a financial statement to show that they cannot make the payments. In addition, the seller's real estate agent must provide a market analysis of the most recent comparable sales to justify the selling price. The bank will also send out their own appraiser some time during the process to get an independent analysis done. 

Just the approval on a short sale can take anywhere from 60 to 120 days, and sometimes even longer. Until the bank approves the sale, the buyer is in limbo, not knowing whether they will actually be able to buy the home. There is, unfortunately, no way to speed up the process. The banks won't even talk to the real estate agents or sellers in the meantime to let them know what the status of the approval is. Often the property goes to foreclosure sale before an approval can be generated. 

In either case, don't expect to have repairs made or receive a lot in buyer concessions (closing costs paid by the seller). Most short sales and foreclosures are sold “as is, where is.”  Banks will only be willing to do the minimum repairs to a property that will allow it to be financed. (Missing flooring, missing stove or A/C, etc.) On a short sale the seller does not have the money to make repairs at all. 

Short Sales vs. Foreclosures -- What's the Difference and Which is Better?

Ok, you've heard the words "short sales" and "foreclosures" flying around and you've probably heard that people who are looking for homes are asking about them and say they can be good deals.  But there is a LOT of confusion out there and lack of understanding when it comes to short sales and foreclosures.

Here is a brief description of each and my real estate agent opinion on which is better:

SHORT SALE

  A "short sale" really means a "short pay."  In other words, the bank who REALLY owns the home is going to LOSE money and come up "short" when the home is sold.  In this situation, most likely the home owner is not able to make their monthly payments and has received FROM the bank an NOD, or "Notice of Default."  According to the foreclosure time table, there is about 90 days from the time an NOD is filed until the home is sold on the court house steps (trustee sale).  Until then, a homeowner who knows there will be no net gain on the sale of their home can hire a real estate agent to negotiate with the bank to take less than what is owed on the property.  In many cases, the real estate agent or company has to negotiate with both the 1st and 2nd loan holders, in which case, the process is much more complicated and more difficult to work out.  These days, many banks do not want to give the 2nd loan holder to receive more than $5000 to "make them go away" when there can be $50,000 or more on the 2nd. 

Why Short Sell the Property?

  The only real reason a home owner would short sell a property is to try to salvage some of their credit.  Typically, a recorded short sale has a little less impact on a home owner's credit than a foreclosure.  Although I wish I could tell you HOW MUCH the difference would be (like 50 or 120 points), that is impossible to do since there are so many factors affecting the overall outcome of any given individual's credit score after a short sale or foreclosure has been recorded.

FORECLOSURE

   A "Foreclosure" is also known as an "REO" or "Bank Owned" property.  A home is foreclosed on by a bank once it has gone to Trustee Sale (bank ordered sale) usually on the court house steps and can be purchased there with cash by an investor or prospective home owner that has tons of cash in the bank.  Homes usually don't sell on the court house steps since the Trustee Sale requires cash.  As a result, the bank takes the property back and assigns the property to a real estate agent / company to sell the property, usually, at a very competitive price (like under market value).  The bad thing about a foreclosure for the home owner is that it is worse possible thing (like a bankruptcy) that can happen to your credit.  I've heard a couple hundred point drop easily in some cases.

THE VERDICT

   For the seller, short sales are the way to go, UNLESS it is an investment property (rental) in which case you may be able to avoid being taxed by the IRS on the difference between assessed value and sold price.  That amount is usually added to your income, the IRS considers it a gift by the bank and you are taxed on the difference.  However, in a an investment property situation, you may be able to avoid taxation on the difference. So, the difference in the credit drop may not be such a big deal when you're avoiding thousands of dollars out of pocket to the government.  BUT, typically, especially if the property is your primary residence, short selling is the way to go.

  For the buyer, foreclosures are better.  With short sales, you may not hear back from the bank on your offer for MONTHS.  With foreclosures, it is usually 24 to 72 HOURS.  With foreclosures, the property is usually sold AS IS, and the bank will make the buyer sign a very very lengthy addendum to protect the bank from all liability and to become the "shot caller" for the transaction.  The buyer must comply with the terms and conditions of the addendum.  However, most of the time my buyers are very concerned with the terms and conditions since they just found a great property for a very good price.  The other problem with short sales (this actually just happened to my buyers last week) is that a BETTER offer can come in and BEAT OUT your offer.  Short sales are unpredictable, at best.  I had an offer in on a short sale in Brea and found out it was in escrow with the agent telling me (so we were obviously out-bidded).  But now the home has fallen out of escrow and is going "back to the bank" as a foreclosure and my buyer is excited that it could be a better deal and we can actually know if we get the property in 1 to 3 days.