Forclosure vs Short Sale Q&A

Understanding what the differences are between a foreclosure and a short sale and acting accordingly can be critical to your overall financial well being. Let's take a look at some frequently asked questions regarding this subject:

Q: How will foreclosure or short sale affect my ability to buy a home in the future?
A: Losing your primary home to foreclosure will make you ineligible for a Fannie Mae backed mortgage for 5 years. If you lose an investment home to foreclosure - ie, a home that is not your primary residence, you will be ineligible for a Fannie Mae backed mortgage for 7 years. If a homeowner or investor successfully negotiates a short sale, these numbers decrease to a mere 2 years for both scenarios. For future loans from any lender, a foreclosure will impact your loan application for 7 years, while a short sale will not impact your app at all.

Q: How will a foreclosure affect my credit score/credit history vs. a short sale?
A: With a foreclosure, your credit score may be reduced anywhere from 250-300 points, an impact that will typically last for over 3 years. Your foreclosure will remain as public record on your credit history for 10 years or more. With a short sale, only late payments will show, and after the sale is complete, the mortgage will report as "paid" or "negotiated". The impact to your credit score can be as little as 50 points, and the affects can be as brief as 12-18 months. A short sale is not reported on a credit history.

Q: Can a foreclosure or short sale affect my employment?
A: If your job requires a security clearance, such as a police officer, military, CIA, and others, your security clearance will likely be revoked, which can result in termination of the position. Even if your job doesn't require security clearance, employers have the right to check the credit of employees in sensitive positions. A foreclosure could be grounds for reassignment or termination. Most employers require credit checks on all job applicants, so for future employment, a foreclosure is one of the most detrimental credit items one can have. On the contrary, a short sale on it's own is not usually an issue for security clearances, and since it is not reported on a credit report, it will have no impact on current or future employment.

Q: What about the balance I owe?
A: Depending on the kind of loan, in most states, the bank has the right to pursue a borrower for a deficiency judgement on either a foreclosure or short sale. In either case, the delinquent amount may be forgiven by the bank. It is up to the borrower to negotiate and ascertain whether or not their delinquent amount has been forgiven or not. In addition, forgiven amounts may be taxed. Consult your tax professional for questions regarding your particular situation.


Deanna Koffler, Nine36 Financial (936 Financial)
Taken from "Foreclosure vs Short Sale - Consequences for Homeowners", Northpoint Escrow & Title