Foreclosures have been a hot topic in the real estate industry for the last few years.  You could be a Jersey Shore homeowner looking at the possibility of foreclosure yourself.  Foreclosure isn’t the only option, though.  A short sale may be an alternative for you to pursue.  But, what is the difference between a short sale and a foreclosure?  Let me explain.

FORECLOSURE
In a foreclosure situation, a homeowner has defaulted on their loan so the bank takes it back as their property.  Sometimes, this is done with a Sheriff standing over you as you vacate your former residence.  This can have a devastating affect on your credit rating.  Your credit score, which is what is typically used by banks to determine your creditworthiness as well as the interest rate they will charge to lend you money, can be reduced by anywhere from 100-150 points. 

A foreclosure will stay on your credit report for seven years.  This will most likely set your credit rating too low for most reputable banks to want to lend you money for any reason.  Also, since many employers run credit checks on prospective employees, this can reflect negatively upon you, resulting in the possibility of denying your job application.

You will be ineligible to purchase another home on the Jersey Shore (or anywhere else) for 5-7 years after the foreclosure proceedings are finished.  If the home that goes into foreclosure was not your primary residence, you cannot purchase another home using Fannie Mae secured funding for at least seven years.  On any loan application you fill out after a foreclosure, they will ask if you have ever had a property foreclosed on.  Answering yes to this question may mean denial of the loan.  Lying (saying no) could mean mortgage fraud and possible legal charges.

SHORT SALE
A short sale occurs when a homeowner or their representative negotiates a deal with their mortgage company that allows them to sell their home for less than what is owed on it.   While this will still negatively affect your credit, a short sale is definitely the lesser of two evils.  For any homeowner who has had a major life change (loss of job or spouse, for example) and needs to move out of their current home before they fall too far behind, a short sale may be a possibility to consider.  If you have never been 30 days late, your credit score may only be hit by 50 points or less.  However, homeowners typically see a 50-100 point drop in their credit score after a short sale. 

Like a foreclosure, a short sale stays on your credit for seven years.  Unlike a foreclosure, it isn’t labeled as a “short sale”.  Instead, it appears as a loan that was paid off for less than was owed.  This shows prospective lenders on future loans that you didn’t just walk away from your financial responsibility.  Also, as long as you have kept your credit in good standing after a short sale, you will be eligible to purchase a home with a Fannie Mae backed loan within two years.  FHA will allow you to buy after three years.  When it comes time to fill out the paperwork for a mortgage loan, you can legally say you sold your home rather than lost it in foreclosure. 

If you have found yourself in a hard financial situation, don’t despair.  Many homeowners have faced similar situations.  Knowing the difference between a short sale and a foreclosure can help you make an informed decision.  Please feel free to contact me with any questions you may have or if you need someone to negotiate a short sale deal with your mortgage company.  I’m here to help!