Top 10 Reasons to Avoid Foreclosure

Before you jump to the conclusion that a foreclosure is your only option, or the easiest/quickest way out of a difficult and stressful financial situation – think again! A short sale (short sales allow a homeowner with a legitimate hardship to sell their property for less than the balance of their mortgages) can be a viable alternative to foreclosure and one that bears serious consideration. Consumers often don’t realize that the ramifications of a foreclosure are very different than those of a short-sale.

For example:

Reason # 1 – Future Fannie Mae Loan – Primary & Non-Primary Residence

A homeowner who loses a home to foreclosure is ineligible for a Fannie Mae backed mortgage for a period of five years vs. a homeowner who negotiates and closes a short sale will be eligible for a Fannie Mae backed mortgage for a primary residence after two years. An investor who allows a property to go to foreclosure is ineligible for a Fannie Mae backed investment mortgage for seven years vs. an investor who successfully negotiates a short sale will be eligible for a Fannie Mae backed investment mortgage after only two years.

Reason #2 – Future loan with any mortgage company

On any future 1003 application, a prospective borrower will have to answer YES to the question “Have you had property foreclosed upon or given title or deed in lieu thereof in the last seven years?” – this will affect future rates. There is no similar declaration or question regarding a short sale.

Reason #3 – Credit Score

In a foreclosure scenario the homeowners credit score may be lowered anywhere from 250 to 300 points – typically affecting the score for over three years. In a short-sale situation only the late payments on the mortgage will show and after sale mortgage will be reported as paid or negotiated. This will lower the credit score as little as 50 points if all other payments are being made. The effect of a short sale can be as brief as 12 or 18 months.

Reason #4 Credit History

A foreclosure will remain as a public record on a person’s credit history for 10 years or more. Whereas, a short sale is not reported on a credit history. The loan is typically reported as ‘paid in full, settled.”

Reason #5 – Security Clearance

Outside of a conviction for a serious misdemeanor or felony, a foreclosure is the most challenging issues against a security clearance. In almost all cases, if a homeowner has a foreclosure and is a police officer, is in the military, CIA or any other position that requires a security clearance the clearance will be revoked and their position will be terminated. A short sale on its own does not challenge most security clearances.

Reason #6 Current Employment

Employers have the right and will actively check the credit regularly of all employees who are in sensitive positions. A foreclosure can be grounds for immediately reassignment or termination, whereas a short sale is not reported on a credit report and is therefore is not a challenge to employment.

Reason #7 Future Employment

Increasingly more and more employees are requiring credit checks on 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 will not challenge employment.

Reason #8 Deficiency Judgment

In 100% of foreclosures (except in those states where there is no deficiency) the bank has a right to pursue a deficiency judgment. In some short sales it is possible to convince the lender to give up the right to pursue a deficiency judgment against the homeowner. 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 properly 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 lower deficiency.

Reason #9 Control

In a foreclosure situation homeowners are often stressed because they don’t know when or how things will happen. In a short sale with a qualified short sale agent assisting the process, much more control can be given in regards to timing and the sale process. With this type of clarity, it’s easier to make an informed decision versus waiting to see what the bank’s next move will be.

Reason #10 Peace of Mind

How can you put a price on ‘Peace of Mind’? The satisfaction knowing one has done everything possible to satisfy one’s debt is priceless and long lasting. This may be the most important reason of all. Homeowners who are delinquent in payments and struggling due to deficient equity are often at their wits end and desperate for help. Local lenders are overwhelmed, and while there are many credit, loan and law companies out there claiming that they can help – for a fee, consumers are quite understandably not sure where to turn.

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