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Losing your home to foreclosure due to an inability to pay your monthly mortgage payments is one of life’s most unpleasant experiences. However, occurrences such as serious illness, a major accident, and divorce or job loss can happen to anyone. If you find yourself in this situation, a Short Sale could be your best option.
The inevitable result of a foreclosure is the lender taking your home. Not only will you lose your home, but the lender can get a judgment against you for the arrearages you owe plus his cost for the foreclosure action. If that isn’t enough, your credit report will be in terminal condition for many years to come, worsening an already bad financial situation and making it very difficult to obtain any other kind of credit. There is no upside to foreclosure. It should be avoided at all costs.
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| Property is sold and lender accepts proceeds as payment in full |
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Lender takes title and forces sale of the property |
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| Depending on the type of loan some lenders who accept a short sale may be able to pursue a borrower for a deficiency judgment. In many successful short sales it is possible to convince the lender to give up this right as part of the short sale |
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In many states, depending on the kind of loan, the bank has the right to pursue a deficiency judgment.
*Not in the Sate of Washington, unless the foreclosure has been filed with the courts |
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| No foreclosure reported to credit bureau |
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A foreclosure will be reported to your credit bureau |
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| Short sale is not reported on a credit history. There is a no specific reporting item for “short sale.” The loan is typically reported “paid in full, settled” |
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Foreclosure will remain as public record on a person’s credit history for 10 years or more |
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| FICO score may drop between 75 – 125 points |
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FICO score may drop between 200 – 280 points |
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| A short sale on its own does not challenge most security clearances |
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Outside a conviction for a serious misdemeanor or felony, a foreclosure can be one of the most challenging issues against a security clearance. If a client has a foreclosure and is a police officer, in the military, CIA, or any other position that requires a security clearance, in most cases clearance will be revoked and the position will be terminated |
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| A short sale is not reported on a credit report and is therefore not a challenge to employment |
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Employers have the right to check the credit of all employees who are in sensitive positions. A foreclosure may be grounds for immediate reassignment or termination |
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| In 100% of foreclosures (except in those states where there is no deficiency), the bank has the right to pursue a deficiency judgment. |
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In some successful short sales, it is possible to convince the lender to give up the right to pursue a deficiency judgment against the homeowner. |
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Negotiated Promissory Note with a Short Sale
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Deficiency Judgment with a Foreclosure
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Many are asking us whether the seller should agree to a negotiated promissory note in a short sale or allow the house to go to foreclosure. While this is a highly discussed issue in today’s marketplace, it really is a very simple decision.
My view is that a negotiated promissory note is ALWAYS better than a deficiency judgment resulting from a foreclosure. Here is why:
Deficiency Judgment:
- The foreclosure judgment will be something you MUST disclose on any application regarding your background. It will be present on your credit report and will hurt you whenever credit is a factor in a decision, including getting a job.
- A deficiency judgment is a monetary judgment. Thus anything you purchase could be attached by the Lender, be it an automobile, jewelry or a new swing-set for your kids.
- Your wages can be garnished.
- Your bank accounts can be frozen and attached, without any advance notice.
- You will be subject to periodic depositions in aid of execution and have to provide copies of all of your financial matters, several times a year. If you repeatedly don't show up for these proceedings, the court can hold you in contempt and even put you in jail (YES - JAIL!!) until you comply.
- In Florida (check other states) you can enjoy each of the above for 20 full years before the judgment is no longer enforceable.
- The judgment usually carries interest. Check your state for the rate. For judgments rendered in 2009, the statutory rate in Florida is currently 8%.
- Fannie Mae underwritten mortgages cannot be obtained until 5 years after the foreclosure judgment.
Negotiated Promissory Note:
- You pay an agreed amount according to the promissory note, which is usually monthly and often at no interest.
- If you no longer can pay the note, you may be able to negotiate a new payment amount or abate payments, for a period of time.
- You may be able to re-negotiate the terms of the promissory note in the future.
- The promissory note is not a judgment so it does not show up on the credit report.
- If a foreclosure suit was entered, even if it went to a foreclosure judgment (but not a sale), the lender will likely dismiss the suit and vacate the judgment, clearing your record, even before you start paying on the promissory note.
- If you stop paying on the promissory note the note holder can then seek a monetary judgment for the unpaid amount.
- FANNIE-MAE underwritten mortgages can be obtained after a short sale in just 2 years.
- Once you repay the promissory note the lender should remove any derogatory credit report postings concerning the negotiated payoff of the mortgage, instantly repairing your credit score.
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