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Why Do a Short Sale as Opposed to Foreclosure?

Many of my clients ask me why should I do a short sale vs. a foreclosure. Here are a few answers to those questions.

With a Short Sale you will lose between 125-150 points on your credit score.

With a Foreclosure you will lose 250 points in most cases.

With a Short Sale we have had an 85% success rate to have the banks waive the right to come after you for the difference of the what is owed, and what the bank receives otherwise known as a deficiency judgement.

With a Foreclosure 100% of the time they get a deficiency judgement that in many cases forces the customer into bankruptcy.

With a Short Sale the ability to get a new loan is hindered, but only for 2 years.

With a foreclosure it is going to be very tough to even get a new loan. Right now they say about 5 years minimum.

There are going to be a lot of changes to Fannie Mae or Freddie Mac in the near future as we have already seen. With a lot of people claiming bankruptcy and doing short sales I thought this chart was great information so you can educate your customers on what to expect in the future and the consequences a short sale or foreclosure may have on the ability to obtain a new loan in the future.

Bankruptcy and Foreclosure Policy Changes (applicable to manually underwritten loans only)

In U-Memo 08-29, we detailed changes to our requirements for borrowers with a prior foreclosure in their credit history. With this U-Memo, we are updating these requirements as well as establishing new requirements for bankruptcy and pre- foreclosure sales. We are updating the requirements regarding the time period that must elapse before borrowers can demonstrate that they have re-established their credit history following an occurrence of a bankruptcy or foreclosure. The following table outlines our current and new policies for manually underwritten loans:

Action

Current Requirements

New Requirements

Bankruptcy (all except chapter 13)

4 year time period from discharge date

The 4 year time period is unchanged; however it is now applied from either the discharge or dismissal date of the bankruptcy action.

Chapter 13 Bankruptcy

2 year time period from discharge date

The time period for Chapter 13 bankruptcy actions is measured as follows:
· 2 years from the discharge date,
Or
· 4 years from the dismissal date.

Exceptions for extenuating circumstances-All Bankruptcy Actions

2 year time period from discharge date. No exception to the 2 year time period for Chapter 13 bankruptcy actions.

The 2 year time period will be measured from the bankruptcy discharge or dismissal date. No exceptions are permitted to the 2 year time period after a Chapter 13 discharge.

Multiple Bankruptcy Filings

No existing policy

A 5 year time period date is now required from the most recent dismissal or discharge for borrowers with more than one bankruptcy filing within the past 7 years.

Exceptions for extenuating circumstances-Multiple Bankruptcy Actions

No existing policy

A 3 year time period from the most recent discharge or dismissal date is required.
NOTE: The most recent bankruptcy filing must have been the result of extenuating circumstances.

Foreclosure

We recently updated (in U-08-29) the time period from 4 to 5 years from the date that the foreclosure sale had been completed.

Additional requirements now apply after 5 years up to 7 years following foreclosure completion date:
· The purchase of a principal residence is permitted with a minimum 10% downpayment and a minimum credit score of 680
· Purchase of a second home or investment property is NOT permitted.
· Limited cash-out refinances are permitted for all occupancy types.
· Cash-out refinances are not permitted for any occupancy type.

Exceptions for Extenuating Circumstances-Foreclosure

We recently updated (in U-08-29) the time period from 2 to 3 years from the date that the foreclosure sale had been completed.

Additional requirements now apply after 3 years up to 5 years following foreclosure completion date:
· The purchase of a principal residence is permitted with a minimum 10% downpayment.
· Limited cash-out refinances are permitted for all occupancy types.
· Cash-out refinances are not permitted for any occupancy type.

Deed-in-Lieu of Foreclosure

4 year time period from completion date ( date deed-in-lieu was executed)

This 4 year time period still applies. Now, the following additional requirements apply after 4 years up to 7 years following completion date:
· The greater of a minimum 10% downpayment or the minimum downpayment required for the transaction is required. This is applicable to purchases for all occupancy types.
· Limited cash out and cash-out refinance transactions for all occupancy types are permitted.

Exceptions for Extenuating Circumstances- Deed-in-Lieu of Foreclosure

2 year time period from completion date

This 2 year time period still applies. Now, the following additional requirements apply after 2 years up to 7 years following completion date:
· The greater of a minimum 10% downpayment or the minimum downpayment required for the transaction is required. This is applicable to purchases for all occupancy types.
· Limited cash out and cash-out refinance transactions for all occupancy types are permitted.

Time period After Pre-foreclosure Sale

No Existing Policy

2 year time period from completion date; no additional requirements.
NOTE: No exceptions are permitted to the 2 year time periods due to extenuating circumstances.

Posted Friday Mar 27