What's The Difference Between A Short Sale And A Foreclosure?

It's a simple question to answer, but rarely taken seriously until it's too late by homeowners whom are facing the possibility of having to move due to a financial hardship or series of unfortunate events. In most peoples' minds, selling a property for less than they owe or simply giving it back to the bank through a foreclosure seems to be the same thing.

However, there are significant differences in credit score, future homebuying possibilities and financial liabilities associated with either a short sale or foreclosure that homeowners need to be aware of in order to protect themselves.

Which Option Will Cost Me More Money?

You might as well live rent free for a few months, right? After all, how bad could the penalties be? Actually, pretty bad.

When you do a point by point comparison of the pros and cons of foreclosures vs. short sales, it's pretty obvious that a short sale is more than worth the time and effort.

One of the major factors to consider for choosing a short sale over a foreclosure is that it may take you less time to financially get back on your feet and in a position of credit worthiness to apply for a new mortgage loan.

First of all, with a foreclosure, you are simply walking away from your debt in the eyes of a new loan provider, and your credit score will certainly show a negative reflection. Future creditors, especially mortgage lenders, look more favorably on a short sale than a foreclosure in most instances. With a foreclosure, a homeowner is ineligible for another Fannie Mae backed mortgage for a period of 5 years.

With a short sale, the waiting period before you can be approved for a new mortgage is reduced to anywhere from one day out of short sale to two years, depending on whether or not the seller made any mortgage payments greater than 30 days late.

To make matters worse, people who go into foreclosure are sometimes forced to go into bankruptcy to protect themselves from future liability from debt.

A short sale, however, settles the debt and eliminates any future recovery of the debt, provided the negotiator has the experience and savvy to obtain a complete lien release and satisfaction with the short sale approval.

Overall, when you look at things long term, a short sale will ultimately allow you to get back into a home and back on your feet a lot sooner than a foreclosure. And with home values as low as they are in today's real estate market, it is nice to at least have the option to purchase a new home with a favorable mortgage rate that could be less than paying rent.

Benefits of a Successful Short Sale Vs. a Foreclosure

Foreclosure can cost you more than just your home. It can also affect things like your ability to get future loans, your credit score, and future employment. Use the following chart to educate yourself on how to avoid the downsides of foreclosure with a successful short sale.

Issue	Foreclosure	Successful 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 after only 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 application, a prospective borrower will have to answer “YES” to question C in Section VIII of the standard 1003 form that asks “Have you had a 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 more than 300 points. Typically will affect a credit score for over 3 years.	Only late payments on mortgage will show, and after sale, mortgage is normally reported as “paid as agreed”, “paid as negotiated’, or “settled”. This can lower the score as little as 50 points if all other payments are being made. A short sale’s effect can be as brief as 12 to 18 months.
Credit History	Foreclosure will remain as a public record permanently, and on a person’s credit history for 10 years or more.	A 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 Clearance	Foreclosure is the most challenging issue against a security clearance outside a serious misdemeanor or felony conviction. 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.	On its own, a short sale does not challenge most security clearances.
Current Employment	Employers have the right and are actively checking in 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 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 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 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 close to market value, and in almost all cases will be better than an REO sale resulting in a lower deficiency.