Impacts on Homeowners Explained – Demystifying Foreclosures and Short Sales

The real estate market is flooded with foreclosures and short sales here in Costa Mesa and Orange County.  From January 2009-January 2010 we saw the number of short sales in Orange County jump by 34%.  Foreclosures and short sales have very different consequences for homeowners when they go to sell their home.  When faced with the notion of a bank foreclosing on your home, homeowners may want to consider being approved for a short sale if eligible.  Why?  Here’s a brief explanation of some of the differences.1. Homeowners who are facing foreclosure will not be eligible for a mortgage backed by Fannie Mae (one of the primary lending sources for mortgages) for 5 years after the foreclosure is completed.  However, homeowners who successfully negotiate a short sale will be eligible after 2 years.2. For any homeowner who allows an investment home to fall to foreclosure, that homeowner will not be able to get a Fannie Mae backed mortgage for 7 years.  If the property sells as a short sale, the investor may try for a Fannie Mae backed mortgage after 2 years.3. Homeowners who want to try to get a mortgage through any other mortgage company will need to reply YES to Question C in Section VIII of a 1003 application.  (The question asks “Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?”)  Answering yes to this question will affect future mortgage rates for homeowners or foreclosed property.  In the case of short sales, some lenders may allow buyers to buy sooner than the 2-year waiting period.  This is not always true though and it would be wise to do your due diligence in searching for a lender.4. For homeowners whose property is foreclosed upon, it is estimated that their credit score drops by 250+ points and this will affect their credit score for about 3 years.  With a short sale, the credit score will only report late mortgage payments.  After the short sale goes through, the report should say that the mortgage was paid or negotiated, which should result in a credit score dropping by about 50 points assuming all other payments are paid on time.  While a foreclosure can affect a credit score for 3 years or more, a short sale can have a shorter affect. Some can have an effect that is as short as 12-18 months.5. One of the biggest things to consider is credit history.  A foreclosure goes on public record and stays on a person’s credit history for 10 years or more.  On the other hand, a short sale does not go on one’s credit history.