Short Sale vs. Foreclosure
Whether you should conduct a short sale or let the home go to foreclosure will depend on several factors. While for some homeowners it's easier to throw up their hands and let the bank take their home, in most cases, that might not be in your best interest.
Updated lender guidelines for buyers after a short sale or foreclosure.
No late payments - If you had no late payments, and your lender forgave loan balance (if you did not have to make payments after short sale on unpaid loan balance):
- Conventional loan (Fannie Mae), you may qualify to buy a home immediately.
- FHA, wait is 3 years, (or 1 year if you can qualify under the Back to Work program).
Late payments - If you had late payments at time of short sale, you wait period is as follows:
• 80% max LTV (20% down) then your wait period is 2 years from completion of the short sale.
• 90% max LTV (10% down) your wait period is 4 years.
• 90.01%+ max LTV (less than 10% down) your wait period is 7 years.
FHA loan, (minimum down payment required is 3.5%).
• 1 year wait period if you qualify for the Back to Work program.
• 3 year wait period for all other individuals.
Summary of all other waiting period requirements.
Conventional (Fannie Mae)
• Bankruptcy, chapter 7 or 11: 4 years, (or 2 years with extenuating circumstances)
• Bankruptcy, chapter 13: 2 years from discharge date, or 4 years from dismissal date.
• Multiple BKs: 5 years if more than one filing within the past 7 years. (If you have extenuating circumstances, then 3 years from most recent discharge or dismissal date.)
• Foreclosure, 7 year wait, (With Extenuating circumstances, wait is 3 years, but max LTV will be 90%, must be your principal residence on a purchase, if refinance, must be rate/term and will allow all occupancy types.)
• Deed-in-Lieu of Foreclosure and Preforeclosures Sales: 2 year wait with max LTV of 80%, 4 year wait with max LTV of 90%, or 7 year wait for higher than 90% LTV.
FHA loans. Typically the wait period for an FHA loan will be 3 years, unless you qualify for the Back to Work program, in which case your wait period would then be only 1 year.
Please note that this in not a commitment to lend. Your application must still be approved by lender and you must meet all other requirements to be approved for a home loan. Guidelines are for general information purposes only, regarding short sales, foreclosures and bankruptcies.
*** Special note regarding bankruptcy. Please be aware, that if you had a bankruptcy, then afterwards you obtain even the smallest negative credit mark (a 30 day late, collection, charge off, etc.) it will be next to impossible to qualify for an FHA or Conventional loan. Underwriters take very seriously the fact that a person would continue in negative credit behavior after having had a bankruptcy. So if you plan on getting a home loan, you must have 100% perfect credit after your bankruptcy, otherwise you can forget about getting a loan. If you do get a negative make, you'll basically have to wait 7 years for the BK to drop off from your credit report in order to qualify once more.
Short Sale Benefits
Here are a few benefits for doing a short sale that may not have occurred to you:
• You are in control of the sale, not the bank.
• You may sleep better at night knowing who is buying your home.
• You will spare yourself the social stigma of the "F" word, foreclosure.
• Contrary to popular belief, you can be current on your payments and still qualify for a short sale.
• Your home sale will be handled like any other home sale.
Buying Again After a Short Sale
If your payments have never fallen behind 30 days late and the lender does not require that you pay back the loan, Fannie Mae guidelines may allow you to buy another home immediately. The wait for an FHA loan is 3 years.
If your payments are in arrears yet a short sale is granted by your lender, you may qualify to buy another home with a Fannie-Mae backed mortgage within two years, regardless of whether the home is your primary residence.
Buying Again After a Foreclosure
With certain restrictions, you may be eligible to buy another home in 5 years if the home was your primary residence. Without restrictions, the wait is 7 years.
If you are an investor and do not occupy the home, the wait to buy with a Fannie Mae insured loan is 7 years.
Effects on Credit After a Short Sale
A short sale is not a derogatory mark on your credit because credit bureaus do not show the word "short sale" on your credit report. It may say "pay as agreed" or "paid as less than agreed," among other categories. Some clients have reported negative FICO score drops from 50 points to 130 points.
The point drop is typically due to being in default, that is behind on your payments.
Effects on Credit After a Foreclosure
A number of sources have reported FICO score drops from 200 to 400 points after a foreclosure. Generally the foreclosure will remain on your credit report as a public record for 10 years.
Credit Reports After a Short Sale
All lenders report short sales differently and some do not report them to the credit bureaus at all.
Credit Reports After a Foreclosure
If a prospective employer runs a credit check on you, your job application may be denied if you have a foreclosure on your record.
Deficiency Judgments After a Short Sale
Judgments are often negotiated between the seller and the short sale bank. In some cases, such as California, if the home is your personal residence and was financed through purchase money, there is no deficiency judgment.
Deficiency Judgments After a Foreclosure
Banks are unwilling to negotiate deficiency judgments with the homeowner after a foreclosure. In California, for example, according to the California Association of REALTORS, a deficiency judgment may be filed regarding a hard-money loan if the lender forecloses under a judicial foreclosure versus a trustee sale or if the second loan is a hard money loan and the sale takes place as a trustee's sale.
Loan Application Questions After a Short Sale
Loan applications do not ask questions about a short sale. You may report that you sold your home.
Loan Application Questions After a Foreclosure
You are required to answer the question: "Have you ever had a property foreclosed upon or given a deed-in-lieu thereof in the past 7 years." If the bank sees you have had a foreclosure, your loan most likely will be denied. If you lie, you may be subject to investigation by the FBI for mortgage fraud.
Length of Time to Move After a Short Sale
If you've had a foreclosure notice filed, you may be able to postpone that action while the bank considers your short sale. The wait for short sale approval can be from 2 to 3 months, or longer.
Length of Time to Move After a Foreclosure
Unless prior arrangements have been made, the bank may want you to immediately vacate the property and can commence eviction proceedings.
Taxation After a Short Sale
A personal residence is exempt from mortgage debt relief until the end of 2012 on a federal level. Some states will still tax you unless you qualify for an exemption. An investor is not exempt from mortgage debt relief, subject to certain conditions.
Taxation After a Foreclosure
Same as with a short sale. Except some lenders immediately send out 1099s, even if the owner is exempt.
In closing, always obtain legal and tax advice before making a decision between a short sale or a foreclosure.