You may already be aware of the difference between a foreclosure and a short sale: on a foreclosure, the bank takes back the property from the homeowner and a short sale is where the bank allows the homeowner to sell the property for less than is owed, forgiving part of the debt. But, have you ever considered what the homeowner consequences are of a foreclosure vs a short sale are? Let me break it down for you below:
Fannie Mae (primary residence) – If a homeowner loses a home to foreclosure, they will not be able to purchase a new home with a Fannie Mae mortgage for at least five years. However, if a homeowner has sold their previous home through a short sale, they will be eligible to purchase a new home with a Fannie Mae mortgage after just two years.
Fannie Mae (non-primary residence) – If a homeowner loses a property in foreclosure, they will not be able to purchase a new investment property with a Fanne Mae-backed mortgage for seven years. However, if a homeowner has sold their previous investment property through a short sale, they will be eligible to apply for a Fannie Mae-backed mortgage loan on a new investment property after two years.
Future Loans – If you have had a foreclosure, you will have to mark “Yes” for Section VIII, Question C on the Standard 1003 form for up to seven years, which will affect your interest rates. There is no such question or request for disclosure about short sales.
Credit Score – A forecosure can ding your credit score anywhere from 250 to over 300 points for more than three years. Since a short sale closure typically shows on a credit report as “paid as agreed” (or something similar), only the late payment will be shown. That will only be around 50 points if all other payments are made. This decrease in points will typically only last 12-18 months.
Credt History – A foreclosure remains on a homebuyer’s credit report for 10+ years. A short sale is not reported to the credit reporting agencies, since there is no “short sale” in the terms of the credit report.
Current Employment – Employers check credit reports and can reassign or terminate your employment if you are in a sensitive position. Since a short sale doesn’t get reported to a credit reporting agency, it has no affect on your current employment.
Future Employment – Most employers do a credit check as part of the hiring process. A foreclosure is deemed one of the most harmful to your chances of getting hired. Again, since a short sale doesn’t get reported to a credit reporting agency, it has no affect on your current employment.
These are just some of the homeowner consequences of foreclosure vs short sale. As you can see, while not the idea scenario, a short sale is the lesser of two evils. If there is anything you can do to avoid a foreclosure, that is the best route to go. Please contact me if you need help with any of your Columbus OH real estate needs.