Foreclosure vs. Short Sale

Take a look at some of the surprising information in the table below from Fannie Mae about the benefits of short sales vs. foreclosures:

ISSUE	FORECLOSURE	SUCCESSFUL SHORT SALE
Future Fannie Mae Loan – Primary Residence (1)	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 successful negotiates and closes a short sale may be eligible for a Fannie Mae-backed mortgage after only 2 years
Future Fannie Mae Loan- Non Primary (2)	An investor who allows a property to foreclose is ineligible for a Fannie Mae-backed investment for a period of 7 years	An investor who successfully negotiates and closes a short sale may be eligible for a Fannie Mae-backed investment mortgage after only 2 years
Future Loan with any Mortgage Company	On any future loan application, you will have to answer “yes” to the question 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 the interest rates you receive in the future	There is no similar declaration or question regarding a short sale.
Credit Score	Score may be lowered anywhere from250 to more than 300 points. Typically will affect a credit score for over 3 years.	After a short sale the mortgage is usually reported as “settled”, “paid as agreed” or “paid as negotiated”.  This is still a negative reporting, but can lower the score by as little as 50 points, if all other payments are current.  In this case, a short sale’s effect can be as brief as 12 to 18 months. Unfortunately, most short sales are accompanied by multiple late payments and those will be reported, further reducing the score and lengthening out the recovery time.
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 expressly reported on a credit history. There is no specific reporting item for a “short sale”.  The loan is typically reported “paid in full”, “settled”. Though this will show as derogatory history, it doesn’t have the same punch as foreclosure, and typically won’t last as long.
Security Clearance	Foreclosure poses a significant challenge to a security clearance, second only to a felony or serious misdemeanor conviction.  A person who is employed as a police officer, firefighter, military personnel, CIA, FBI or any other profession requiring a security clearance being revoked and the position being terminated.	On its own, a short sale does not challenge most security clearances. (3)
Current Employment	Employers have the right to check the credit of all employees who are in sensitive positions and may do so regularly.  In many cases, a foreclosure is reason for immediatereassignment or termination.	A short sale is not expressly reported on a credit report and is therefore not a direct challenge to employment. (4)
Future Employment	Many employers require credit checks on their job applications A foreclosure is one of the most detrimental credit items an applicant can have and inmany cases will challenge employment opportunities.	A short sale is not reported on a credit report and is therefore not a direct challenge to employment. (5)
Deficiency Judgment	In 100% of foreclosures (except in those states where there is no deficiency), the bank has the right to pursue the deficiency judgment.	In s few short sales, it is possible to convince the lender to give up the right to pursue a deficiencyjudgmentagainst the homeowner.
Deficiency Judgment (amount)	The process of foreclosing, holding, marketing and selling a house is very costly for the bank.  Unless it sells at the public auction, the resultingdeficiency will almost always be higher than if the property were sold short.	In a property 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 alower deficiency.

1. Fannie Mae Announcement 08-16: Michael A. Quinn, Senior VP, Single Family Risk Officer
2. Fannie Mae Announcement 08-16: Michael A. Quinn, Senior VP, Single Family Risk Officer
3. The term “short sale” does not expressly appear on a credit report. –May 14, 2008, Experian.com
4. The term “short sale” does not expressly appear on a credit report. –May 14, 2008, Experian.com
5. Short Sales are currently not explicitly reported on a credit report.