Foreclosure Vs. Short Sale Know The Risks

For any homeowners who are in the predicament of choosing a short sale versus a foreclosure, this information is for you. Many people will tell you to just let the property go to foreclosure and in some cases that is the best route, but more often than not, a short sale makes more sense for your long-term financial picture.

A short sale and a foreclosure are not the same thing in terms of effects on credit scores.

Let’s first take a look at foreclosures and what the effects on credit is as a result of a foreclosure on your credit report.

Here are the facts:

A homeowner who loses a home to foreclosure is ineligible for a mortgage loan for a period of three years. A four year term can be granted on an exception basis only for conventional financing.

An investor who lets the property go to foreclosure is ineligible for investment property mortgage for seven years.

On any perspective mortgage loan applications the borrower has to answer the question on the application that states “have you had a property foreclosed upon or given title or deed in lieu of thereof in the last seven years? This will potentially affect your new interest rate on that new mortgage.

Your actual credit score could drop anywhere from 250 to more than 300 points. This will usually affect the credit score for more than three years. Additionally, the foreclosure will remain on your credit report for a least 10 years. Foreclosure is the most challenging issue against security clearance outside of a conviction of a serious misdemeanor or a felony. If you have a foreclosure on your credit report and you are a police officer, in the military or work for a classified government role or any other position that requires a special security clearance, the security clearance could be revoked and the position will be terminated.

Do a foreclosure or do a short sale?

Now let’s examine the consequences of a successful short sale.

A homeowner who successfully negotiates imposes for sale will be eligible for a mortgage loan within three years.

An investor who successfully negotiates imposes a short sale will be eligible for a new mortgage investment property loan within five years.

Remember the loan application? There is no question about having a previous short sale.

Only the derogatory mortgage payments will show up on the credit report and after the sale is complete the mortgage will be reported as paid for less than balance owed or negotiated. This will lower the credit score upwards of 50 to 70 points provided the homeowner is current on all of their other monthly debt obligations. The short sales effect on a credit score is short-term, a period of 12 months or so is the amount of time it will take to get the credit score back up.

Most the time the short sale does not affect security clearances with employment status.

Well there you have it the full breakdown on foreclosures versus short sales. If you can sell your property by doing a short sale rather than simply walking away from the property, do it. More often than not, you can justify doing the short sale.

Here’s some food for thought: if you purchased your house in California and the mortgage loan that’s presently in place is a purchase money mortgage, meaning the mortgage loan that you have was originally used to acquire the property and you do a short sale, your lender cannot sue you because it is a non-recourse mortgage. If it is refinance money then you need to have a conversation with a real estate attorney because that constitutes a potential recourse mortgage. Always make sure to speak with a real estate attorney regardless.

If you are thinking about doing a short sale or a foreclosure, and your credit is still good, and you are still current on all of your other payments contact a local loan officer first.

Note: If you have already done a short sale or foreclosure and want to repurchase a home again.

Make sure to look at all of your options before making any hasty decisions. Most loan officers have a general understanding of the credit scoring model and can assist you appropriately.

Learn which loan programs you can use to get a mortgage with bad credit.

It’s a tough decision, but you need to do what makes the most sense for your family and your finances. If you have any questions or would like a confidential conversation, you can give me a telephone call at 707-217-4000. Decide on Foreclosure Vs. Short Sale Know The Risks upfront.



















Posted in:


Why you should wait for your credit to improve before applying for a mortgage

Why you should wait for your credit to improve before applying for a mortgage

In the current consumer landscape, securing approval for a mortgage is a significant challenge. It’s…

why being a picky home buyer could be an issue

Why being choosy as home buyer could be problematic

You’ve decided to buy a home, you’ve gotten preapproved with a lender, your file has…

can you buy a house with less than 600 credit score?

Can you buy a house with a less than 600 credit score?

For families were looking to buy a home one of the biggest setbacks people have…

Should you buy a house or wait for the market to improve?

5 signs you should wait to buy a house

If you’re thinking about buying a home, but you’re just not sure. You’re probably better…

View More from The Mortgage Files:


  1. […] Chapter 5,8,9 are synonymous with a foreclosure- the big F Word in mortgage lending which prevents a consumer from successfully getting a mortgage two years post short sale. […]

begin your mortgage journey with sonoma county mortgages

Let us make your mortgage experience easy. Trust our expertise to get you your best mortgage rate. Click below to start turning your home dreams into reality today!