Maureen Megowan's Blog


Frequently Asked Question #10 - What are the advantages and disadvantages of a short sale versus a foreclosure?


Advantages to a Short Sale versus a foreclosure are as follows:

1)Impact on Credit Score: The FICO website states : "The common alternatives to foreclosure, such as short sales, and deeds-in-lieu of foreclosure are all "not paid as agreed" accounts, and considered the same by your FICO® score. This is not to say that these may not be better options for you from a financial perspective, just that they will be considered no better or worse for your FICO score."
Even so,  lenders when looking at your credit score consider a short sale much less negatively than a foreclosure as it shows that you made the best attempt possible at solving your financial problem.

2) Credit History: Foreclosures will remain on a credit history for 10 years or more. Short sales, however,  are typically reported as "paid in full, settled" or "paid as agreed" . This would show up on the borrower's credit report as a negative mark for seven years.  (Cal. Civ. Code § 1785.13.)

3) Future Loan from Fannie Mae for Principal Reidence:  A borrower will normally be able to get another Fannie Mae loan after only 2 years after a short sale. After a foreclosure, a borrower is ineligible for a Fannie Mae loan for 5 years

4) Future Loan from another mortgage company for conventional financing:  On the form 1003 Credit Application required by lenders, a borrower must answer yes to question G in Section VIII of form 1003 that asks "have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years", which will affect the borrowers approval probability or the interest rate to be paid. There is no similar question dealing with a short sale.

5) Security Clearances: If a person has a foreclosure and is a police officer, in the military, in the CIA or any other position that requires a security clearance, the clearance will be revoked and employment will be terminated. A short sale on its own does not challenge most security clearances.

Disadvantages to a Short Sale versus a foreclosure are as follows::

1) One disadvantage to a borrower relating to a short sale is the very time consuming and complex process of completing a short sale.

2)  In California, if the lender does not grant a full release of liability for the loan and only releases their lien on the property in their short sale approval letter,  they can attempt to collect any deficiency between what is owed on their loan and the sales proceeds they receive from the short sale.  Recent legislation in California has granted deficiency judgment protection in a short sale, however, where the lender has agreed to the short sale.In a foreclosure under a non-judicial foreclosure where they simply foreclose under their deed of trust and not through a law suit through the courts, the lender would have been prohibited from pursuing collection of a deficiency.

Why would a lender agree to a short-sale instead of a foreclosure action?

1) The lender could become responsible for many unpaid fees related to the property upon foreclosure, including unpaid HOA fees, property taxes, utilities, etc.
2) The lender avoids the time delays and uncertainty involved in marketing the property after foreclosure. They also avoid such costs of marketing the property as advertising.
3) The lender avoids the extensive costs of the foreclosure process including attorney's fees, possible delays due to bankruptcy filings, as well as possible deterioration of the property during the period it is owned by the lender after foreclosure.
4) if the property contains hazardous materials, particularly asbestos, lenders are often reluctant to take title to property with such materials as it puts them on the "chain of title" in case liability claims are raised due to the presence of asbestos.

**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax or legal professional should always be consulted before utilizing any of the information contained at this site.**

The information above was obtained from my website at Foreclosures/ Short Sales

For more information about Palos Verdes and South Bay Real Estate and buying and selling a home on the Palos Verdes Peninsula, visit my website at . I try to make this the best real estate web blog in the South Bay Los Angeles and the Palos Verdes Peninsula. I would love to hear your comments or suggestions.

Comment balloon 0 commentsMaureen Megowan • May 29 2012 02:01PM
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