Short Sale Versus Foreclosure Mortgage Guidelines

This BLOG On Short Sale Versus Foreclosure Mortgage Guidelines Was UPDATED On December 10th, 2018

Are There Benefits Of Short Sale Over Foreclosure?

There are benefits of a short sale instead of a foreclosure if home buyers are planning on buying a new home with Conventional Loans. Waiting Periods to qualify on Conventional Loans after a deed in lieu of foreclosure and short sale versus foreclosure is different.

Many homeowners who are financially burdened with their current housing mortgage payments and have mortgages higher than the value of the home
In order to sell their homes, they need to come up with the money to cover the difference between the sales price and outstanding mortgage balance
They have three options: Foreclosure, deed in lieu of foreclosure, or short sale
Homeowners who go through a short sale, deed in lieu of foreclosure, or foreclosure can qualify for mortgages after meeting mandatory waiting periods
Understanding differences between a short sale, deed in lieu of foreclosure, or foreclosure and how it affects them in the future when purchasing another home is important

In this article, we will cover and discuss mortgage guidelines after housing event.

Waiting Period After Foreclosure Versus Short Sale

There are many benefits with a short sale over a foreclosure:

Homeowners who go through a short sale need the lender’s permission to be able to sell their home below the balance of their loan
Short Sales are normally done when a homeowner has a home where the value is lower than the balance of their loan
The short sale process is like any other home sales process with the exception that the lender needs to approve the final sales price
The homeowner picks the realtor and shows their home and submits the offer to the lender for approval
Homeowners will be handling the sale as the seller and not the bank
Homeowners can still do a short sale even if their mortgage payments are current and have had a timely payment record

There is no waiting period to qualify for FHA or VA Loan if a homeowner had a short sale and had their monthly mortgage payment current up to the date of the short sale.

Conventional Loan Waiting Period After Short Sale Instead Of A Foreclosure

Homeowners who had a short sale used to be able to qualify for conventional loans two years after the date of the short sale with a 20% down payment.

However, this is no longer the case
New waiting period requirements were implemented
Homebuyers can qualify for conventional loans four years after a short sale and/or deed in lieu of foreclosure with 5% down payment

Waiting Period After A Housing On Government Loans

The waiting list for FHA and USDA Loans after the recorded date of deed in lieu, foreclosure or short sale is 3 years.

The waiting period for FHA, VA, USDA Loans after Chapter 7 Bankruptcy discharged date is 2 years
The waiting period after a short sale, deed in lieu, or foreclosure for VA Loans is 2 years
Government Loans classify short sale, deed in lieu, and foreclosure all in one category

The waiting period to qualify for home loans is the same, unlike Conventional Loans.

Downfalls Of Foreclosures

Purchasing a home after a foreclosure has longer waiting period requirements to qualify for a new mortgage under Fannie Mae/Freddie Mac Guidelines than after short sale and/or deed in lieu.

The normal waiting period to qualify for a conventional mortgage loan for a primary residence is 7 years after the recorded date of a standard foreclosure
Waiting Period to qualify for conventional loans after a short sale and/or recorded date of deed in lieu of foreclosure is 4 years

Will Credit Scores Suffer After Short Sale Over A Foreclosure?

Credit scores will drop significantly after bankruptcy, foreclosure, short sale, and/or deed in lieu of foreclosures.

However, the sudden credit score drop is temporary and credit scores eventually will go back up
The best way to boost and re-establish credit after a short sale, bankruptcy, deed in lieu, and/or foreclosure is by adding positive credit
Secured Credit Cards are the best, easiest, and fastest way of re-establishing credit after bankruptcy, foreclosure, short sale

Eventually, as the bankruptcy, foreclosure, deed in lieu of foreclosure, short sale ages, it will have little to no impact on credit scores.

Credit Reporting On Agreed Or Paid Settlements

Public records will remain on consumer credit reports.

Lenders report public records on consumer credit reports
Derogatory credit remains on credit report for 7 years
Chapter 7 Bankruptcies remain on credit reports for 10 years
Both foreclosures and repossessions will be reported on the credit report for at least 7 years from the date of last activity
First delinquency date that eventually led to the final foreclosure is normally the date of last activity
Current bankruptcies, deed in lieu of foreclosure, and foreclosures can drop credit scores by more than 100 to 150 points

Again, the sudden drop will eventually go back up as the public record ages.

Deficiency Judgments

In the event, if the foreclosure is followed by a deficiency judgments, you can add another 120 point credit score drop to your bruised credit score.

In most short sale cases, the deficiency is oftentimes waived by the mortgage lender.

In the event, if the short seller encounters a deficiency judgment, it can often be negotiated between the short seller and the short sale mortgage lender
A deficiency judgment can be issued against the homeowner after a home foreclosure

Both Short Sale And Foreclosure Will Negatively Impact Credit

However, a short sale is a much wiser choice than a foreclosure.

Consumers should not worry about negative credit impact when a short sale or foreclosure gets posted on credit report
The sudden drop in credit scores is just temporary after short sale or foreclosure
Credit scores will go up as time passes even if consumers do not do anything to it
If credit scores dropped from 700 FICO to a 450 FICO after a short sale or foreclosure, the credit will go up to close to 600 in about a year
Credit Scores can be 700 FICO Plus if consumer adds new positive credit like secured credit cards
Many consumers start re-establishing credit by getting a few secured credit cards after a short sale or foreclosure

Re-Establishing credit with secured credit cards can expedite boost of credit scores to the 700 FICO score after a year of short sale and/or foreclosure.

Related> Mortgage After Short Sale

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