Short Sale Explained

Foreclosure vs. Short Sale

Future Fannie Mae Loan

(Primary Residence)

A homeowner who loses a home to Foreclosure is ineligible for a Fannie Mae 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)

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 VIII of the standard 1003 that asks “Have you had property foreclosed upon or given title or deed-in-lieu thereof in the last 7 years?” This will affect future rates. There is no similar
declaration or question
regarding a short sale.
FHA – If current at the close
of short sale, a homeowner
may apply for an FHA loan immediately. If homeowner
is late before close of short
sale closing, will be eligible
for FHA loan after 3 years.
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 mort-
gage will show, and after
sale, mortgage is normally
reported as “paid as agreed,” “paid as negotiated,” or “settled.” This
can lower the score as little
as 50 points if all other
payments are being made.
A short sale’s effect 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 7 years or more. A Short Sale is not reported
on a persons credit history.
There is no specific reporting item for
“short sale.” In most cases a
loan is typically reported
“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 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. On its own, a short sale
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 pursuit a
deficiency judgment against
the homeowner.
Deficiency Judgment


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 a
lower deficiency.




A short sale could be a solution for homeowners who need to sell, and who owe more on their homes than they are worth. In the past a bank or lender to accept a short sale was rare. Today, due to overwhelming market changes, banks and lenders have become much more negotiable when it comes to Short Sale transactions. Recent changes in corporate policy have also improved the chances of getting a short sale approved.

Here is the definition of a short sale.

  • A homeowner is ‘short’ when the amount owed on his/her property is higher than current market value.
  • A short sale occurs when negotiations are entered into with the homeowner’s mortgage company (or companies, sometimes this involves a second and third lloan) to accept less than the full balance of the loan at closing. A buyer closes on the property, and the property is then ‘sold short’ of the total value of the mortgage.

Homeowners need to qualify for a short sale, they must fall into any or all of the following circumstances:

  • Financial Hardship – There is a situation causing you to have trouble affording your mortgage.
  • Monthly Income Shortfall – In other words: “You have more month than money.” A lender will want to see that you cannot afford, or soon will not be able to afford your mortgage.
  • Insolvency – The lender will want to see that you do not have significant liquid assets that would allow you to pay down your mortgage.

It is a complicated process that takes the expertise of experienced professional. We hold the CDPE® Designation and are ready to identify all possible options and, when possible, assist in the quick execution of a short sale transaction.

If you have questions or feel you may qualify for a short sale, please contact us for a free consultation.

Understanding your options now could mean all the difference in the world.

We hope you will put your trust in us,

    Lucy Barraza & Associates