Short Sale vs. Foreclosure

There are many reasons that motivate homeowners to short sale their home, rather than allowing it to foreclose.

This video explains many of the most important differences between a short sale and a foreclosure, including:

  • Your ability to obtain a mortgage again in the future
  • The effect on your credit score
  • Security Clearances which may apply to you
  • Impact on current & future employment
  • Deficiency Judgments

Short Sale vs. Foreclosure

Video Transcript

Unfortunately, there's been a lot of confusion in the media whether a short sale is truly better for a homeowner than a foreclosure.  To find the answers, let's take a closer look at short sale versus foreclosure. Let's establish five criteria for comparison:

  • First, the ability to obtain a mortgage in the future
  • Second, the effect on credit score and credit history
  • Third, possible effects on security clearances in a variety of industries
  • Fourth, a very important issue for homeowners today - current and future employment
  • And five, the deficiency judgment. What rights does a lender have to pursue a deficiency balance in short sale and in a foreclosure?

Now that we've established our criteria, let's get started. In a foreclosure, homeowners may have to wait up to 7 years to qualify for a new home loan. In a short sale, a homeowner will be able to qualify for a Fannie Mae-backed loan within only 2 years, as long as they are able to meet loan criteria. And if a homeowner who did the short sale meets certain eligibility requirements, they can buy a home within 2 years with even less loan criteria. This point goes to a short sale.

Next let's look at the effect on credit scores and credit history. This is one of the most widely-debated topics surrounding short sales and foreclosures. Some have made the unfortunate argument that there is no difference in the effect on a credit score whether homeowners short sale or allow a home to foreclose. While nobody's credit profile is exactly the same, the short sale will almost always have less of an effect on credit score decline than a foreclosure. In fact it can affect an individual's credit score as little as fifty points as all other credit installments are being paid. And, in some anecdotal cases, there's been little or no effect on a credit score in a short sale. Another benefit for credit and short sale is that if it is reported as "paid as agreed" or "paid as negotiated", it usually remains on a homeowners record for two to three years. Foreclosure is reported in no uncertain terms on a credit report, remains in credit history for 7 years, and is part of permanent public record. Another point for a short sale.

Let's move on to the third point for comparison - security clearances. While it may not be as common, there are a significant number of homeowners whose employment involves some sort of security clearance or security check. Foreclosures will almost always have a negative effect on security clearances on their own. Short sales will rarely challenge most security clearances. Many people don't understand that security clearances today are required in a variety of industries, not only the military. For example, high-level police, fire department, government agencies, software development corporations, certain areas of telecom, and much, much more all require security clearances or security checks. Looks like another point for the short sale.

Let's move on to number four - the effects on current and future employment. This may be the single most important issue to many homeowners today, as more and more employers review credit upon employment of a new hire and do continuous credit checks. A foreclosure may have adverse effects on a very important part of everyone's life, either getting a job or two, keeping your job. Short sales are not reported on a credit report and therefore on their own do not specifically challenge employment.

It's already clear who the winner is but will this be a shutout? Let's move on to the final criteria - deficiency judgments. There may be nothing more stressful than losing a home other than the prospect of a lender demanding payment or amount owed for the rest of a homeowner's life, even after foreclosure. In a short sale, a homeowner has the opportunity to negotiate and completely eliminate a deficiency judgment. When a property goes into foreclosure, this right is forfeited in most states and a lender has the ability to pursue a deficiency judgment. So it looks like short sale is a shutout victor in the know snowed battle of short sale vs. foreclosure

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