ISSUE |
Foreclosure |
Successful Short Sale |
| Future Fannie Mae Loan - Primary Residence (effective May 21, 2008) | A homeowner who loses a home to Foreclosure is ineligible for Fannie May backed mortgage for a period of 5 years. | A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed mortgage after only 2 years. |
| Future Fannie Mae Loan - Non Primary (effective May 21, 2008) |
An Investor who allows a property to go to Foreclosure is ineligible for a Fannie Mae backed investment mortgage for a period of 7 years. | An investor who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed investment mortgage after only 2 years. |
| Future Loan with any Mortgage Company | On any future 1003 application, a prospective borrower will have to answer YES to question C in Section VII of the standard 1003 that asks, "Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 yeras?" This will affect future rates. | There is no similar declaration or question regarding a short sale. |
| Credit Score | Score may be lowered anywhere from 250 to over 300 points. Typically will affect score for over 3 years. | Only late payments on mortgage will show and after sale mortgage will be reported as paid or negotiated. This will lower the score as little as 50 points if all other payments are being made. A short sale's affect can be as brief as 12 to 18 months. |
| Credit History | Foreclosure will remain as a public record on a person's credit history for 10 years or more. | Short sale is not reported on credit history. There is no specific reporting item for 'short sale'. The loan is typically reported 'paid in full, settled'. |
| Security Clearances | Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. If a client has a foreclosure and is a police officer, in the military, in the CIA, Security, or any other position that requires a security clearance, in almost all cases, clearance will be revoked and position will be terminated. | A Short Sale on its own does not challenge most security clearances. |
| Current Employment | Employers have the right and are actively checking the credit regularly of all employees who are in sensitive positions. A foreclosure in many cases is ground for immediate reassignment or termination. | A short sale is not reported on a credit report and is therefore not a challenge to employment. |
| Future Employment | Many employers are requiring credit checks on all job applicants. A foreclosure is one of the most detrimental credit items an applicant can have and in most cases will challenge employment. | A short sale is not reported on a credit report and is therefore not a challenge to employment. |
| Deficiency Judgment | In 100% of foreclosures (except in those states where there is no deficiency) the bank has the right to pursue a deficiency judgment. | In some successful short sales it is possible to convince the lender to give up the right to pursue a deficiency judgment against the homeowner. |
| Deficiency Judgment (amount) | In a foreclosure the home will have to go through an REO process if it does not sell at auction. In most cases, this will result in a lower sales price and longer time to sale in a declining market. This will result in a higher possible deficiency judgment. | 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 a lower deficiency. |
Short Sale Definition: a short sale occurs when a home's market value is less than
the outstanding mortgage debt plus sales costs (sometimes called an "upside down
mortgage"). In order for a short sale to actually close, the mortgage bank(s) must
agree to write-off a portion of the outstanding loan debt.
Why Would a Mortgage Bank Consider a Short Sale? Lenders often entertain
such an option for in the long run, they will usually receive a higher percentage of their
principal back as compared to forcing the property into foreclosure. In a foreclosure,
the mortgage bank runs the risk of property neglect or damage, and additional delays
and costs, and other market losses.
How is a Short Sale Negotiated with a Mortgage Bank? Short sales are one of
the most difficult and complicated residential transactions. Compared to a normal sale,
these transactions require additional paperwork, intricate negotiations with the
mortgage banker(s), and careful preparation of the process and purchase offer. A
short sale package typically includes: a purchase offer contract, buyer's loan
qualifications, a realistic and detailed analysis of the fair market value of the home,
current local real estate market conditions, seller financial information, seller hardship
letter and more.
Basically, the short sale real estate professional must demonstrate to the mortgage
bank(s) that the home is upside down, the purchase offer is fair and just and that the
homeowner has a financial hardship worthy of a short sale. This financial hardship can
be due to job layoffs, illnesses, divorce or even the unexpected large increase in
mortgage payments due to interest rate resets.
Do I Need a Real Estate Professional to Conduct my Short Sale? It is
theoretically possible to conduct your own short sale (ie: Do-It-Yourself). But why
would you? In a short sale, the seller is not allowed to net any money from the
transaction and the lender pays all Realtor fees. These are very compllicated
negotiations, which we are trained to handle. In other words, there is no advantage to
you NOT using a professional to negotiate on your behalf.
Loan Modification Definition: A loan modification is a negotiated legal alteration of
the terms and conditions of your existing mortgage loan, in order to obtain lower
mortgage payments or reduce the loan balance, or both. In today's declining real estate
market in Arizona, refinancing is available to only a select few. Getting approved for a
traditional refinance is extremely difficult.
The goal of a loan modification is to change the amount of payment to a level where
the borrower can consistently make their mortgage payment as well as pay other bills.
Why Would a Bank Accept a Loan Modification? Mortgage banks would much
rather settle for a loan modification than foreclose and take your home back. On
average, banks stand to lose over 50% if they foreclose, and therefore would rather
collect lower payments than none at all. Banks do not want a mortgage to consume an
entire monthly budget. They will take the homeowner's entire budget into consideration
i.e. car payments, cell phone, utilities, credit cards payments, etc.
Who Typically Qualifies fora Loan Modification? There are 3 basic criteria that
most mortgage banks consider for the approval of a loan modification. 1.) The ho
meowner should have very little or no equity in their home. 2.) The homeowner is exp
ected to have a total income approximately equal to, or no more than 10% of the ho
meowner total expenses. 3.) The homeowner's liquid savings should be no more than
about 8 mortgage payments.
