Plenty More Short Sales Still to Come

I was wondering just the other day when we might start to see short sales on the decline and a rebound in traditional sales once more. If you think about it, at some time in the future the massive amount of short sales must slow, though I’m sure they will never stop completely.

What will it mean to the market in roughly 3+ years when so many of those people who sold short and are now renting will once again be eligible to get financing and purchase a home?

It will be the resurgence of the traditional sale, that’s what!

Our current inventory of homes for sale is roughly 65% short sales and only 35% traditional! This has been the average split for quite some time now and it doesn’t seem like it’s going to change any time soon.

A large percentage of the people who must sell their home through short sales are now renting. As mentioned previously, what happens in 3-4 years when they want to buy again? A real estate boom is what happens.

… Let’s just hope that “we” (and I don’t mean you and I, I mean those that wrote all those bad loans etc.) have learned from our mistakes in the past and “we” don’t repeat this cycle again after people are able to recover.

Unfortunately though, human greed has a way of rearing it’s ugly head.

Foreclosure vs. Short Sale Comparison Chart

There are many differences between Foreclosure and Short Sales when it comes to selling a property where the amount owed on the mortgage is greater than what the home can be sold for in the current market.

There are a lot of common misconceptions regarding foreclosures and not everyone is aware that there are other options available. If you feel you might be in a situation where you might be looking at foreclosure, then you should probably consult with a “Certified Distressed Property Expert” so you cover all possible options you have available at your disposal.

Here is an overview of some of the differences between Foreclosure and Short Sales:

Future Loans – Primary Residences

Loan Foreclosure Short Sale
Fannie Mae Ineligible for a mortgage for 5 years after the foreclosure date eligible for a Mortgage after only 2 Years from the closing date of the short sale
FHA Loan – Delinquent Ineligible for a mortgage for 5 years after the foreclosure date eligible for a Mortgage after only 3 years from the date the FHA insurance claim is paid to the lender – not the date of the closing date
FHA Loan – Current Ineligible for a mortgage for 5 years after the foreclosure date No Wait period – borrower must be current on all obligations, including installment debt.
VA Loan – Delinquent Ineligible for a mortgage for 5 years after the foreclosure date eligible for a Mortgage after only 3 Years from the closing date of the short sale
VA Loan – Current Ineligible for a mortgage for 5 years after the foreclosure date eligible for a Mortgage after only 3 Years from the closing date of the short sale
Conventional Loan – Delinquent Ineligible for a mortgage for 5 years after the foreclosure date eligible for a Mortgage after only 2 Years from the closing date of the short sale
Conventional Loan – Current A borrower will have to answer Yes on an application for 7 years after a foreclosure or deed-in-lieu.  This will effect interest rates No Wait period – borrower must be current on all obligations, including installment debt.

 Future Loans – Non-Primary Residences

Loan Foreclosure Short Sale
Fannie Mae Ineligible for a mortgage for 7 years after the foreclosure date eligible for a Mortgage after only 2 Years from the closing date of the short sale
Conventional Loan– Delinquent A borrower will have to answer Yes on an application for 7 years after a foreclosure or deed-in-lieu.  This will effect interest rates eligible for a Mortgage after only 7 Years from the closing date of the short sale
Conventional Loan – Current A borrower will have to answer Yes on an application for 7 years after a foreclosure or deed-in-lieu.  This will effect interest rates eligible for a Mortgage after only 5 Years from the closing date of the short sale

 Additional Future Impacts

Issue Foreclosure Successful Short Sale
Credit Score Score may be reduced 250 – over 300 points.  Will typically affect score for over 3 years. Only late payments will show on credit.  Can lower score as little as 50 points if all other payments are being made.  Can effect score as briefly as 12 – 18 months
Credit History Foreclosure will remain on credit report for 10 years or more. A short sale is not reported on a person’s credit.  Will be reported as Paid in full, settled, or paid as negotiated.
Security Clearances Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony.  If a person who is a police officer, in the military, in the CIA, in the FBI, Security officer, or any other position that requires a security clearance, clearance will be revoked and the position terminated in almost all cases A short sale does not challenge security clearances
Current Employment Employers have the right and are actively checking credit regularly of employees who are in sensitive positions.  A foreclosure may be grounds for 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 for job applicants.  Foreclosure is one of the most detrimental credit items one can have on a credit report, and will remain there for 10 years of more.  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 (in states where applicable, like NV), the bank has the right to pursue a deficiency judgment. In many cases, the lender agrees to give up the right to pursuit a deficiency judgment in order to allow the short sale.
Deficiency Judgment (amount) In a foreclosure, the home will have to go through an auction and in many cases an REO process.  This will typically result in a lower sales price and additional expenses will be added to the unpaid balance.  This may result in a higher deficiency judgment. If the lender did not waive their right to a deficiency judgment, the home is typically sold at market price with no additional expenses to the lender.  This will result in a lower deficiency judgment than a foreclosure.
Tax Consequence

(may qualify under the mortgage debt forgiveness act of 2007)

Will receive a 1099 for the amount of the loan forgiven, and may need to pay taxes on this amount.  This amount may include any additional expenses applied during the foreclosure, auction, and REO process.  If sold at auction for a lower sales price, the amount being forgiven (and subsequent tax liability) will be greater. The home is typically sold at market price with no additional expenses to the lender.  This will result in a lower amount being forgiven, and therefore a lower tax consequence.

Homeowners Take Action Seminar

Stop being paralyzed by fear and indecision; it’s time to take action! Homeowners everywhere are learning their options and taking action in today’s new economy. With more job losses, falling property values and tight money policies, what should you be doing “now” to protect yourself and your family?

Come and learn ways to:

  • Modify your loan to a lower fixed rate
  • Stay in your home
  • Short Sale your home
  • Avoid stress / embarrassment of foreclosure
  • Lessen the effects on credit
  • Put a plan in place to rebuild your credit

Mark your calendars for Thursday Sept 30th from 6:30 – 7:30pm for this dynamic seminar to be held in Burnsville, MN.

Event speakers will be Certified Short Sale Expert Jeff Scislow of RE/MAX Results, Rob Bonahoom, mortgage consultant with Cornerstone Mortgage and Craig Nester, Director at Minnesota Home Rescue Team.

Location: 436 Gateway Blvd in Burnsville (I-35 to Burnsville Pkwy, east ½ blk to Gateway Blvd, north 2 blks to 436 building (on left). Call (651) 485-3710 now to register for this free seminar!