Short Sale vs. Foreclosure – How Does it Impact You?

Short Sale vs. Foreclosure - How Does it Impact You?

Did you know:

Time lenders typically require to repurchase a home:
Short sale: three  years
Foreclosure: five to seven years

Points drop in credit score
Short sale: 50-130
Foreclosure: 200-400

Buying again after a short sale

If your payments have never fallen behind 30 days late and the lender does not require that you pay back the loan, Fannie Mae guidelines may allow you to buy another home immediately. The wait for an FHA loan is three years.

If your payments are in arrears yet a short sale is granted by your lender, you may qualify to buy another home with a Fannie-Mae backed mortgage within two years, regardless of whether the home is your primary residence.

Buying Again After a Foreclosure

With certain restrictions, you may be eligible to buy another home in 5 years if the home was your primary residence. Without restrictions, the wait is seven years.

If you are an investor and do not occupy the home, the wait to buy with a Fannie Mae insured loan is seven years.

Affects on Credit After a Short Sale

A short sale is not a derogatory mark on your credit because credit bureaus do not show the word “short sale” on your credit report. It may say “pay as agreed” or “paid as less than agreed”.   FICO scores drop from 50 points to 130 points.

The point drop is typically due to being behind on your payments.

Affects on Credit After a Foreclosure

FICO scores typically drop 200 to 400 points after a foreclosure. Foreclosure remains on your credit report  for ten years.

Loan Application Questions After a Short Sale

Loan applications do not ask questions about a short sale. You may report that you sold your home.

Loan Application Questions After a Foreclosure

You are required to answer the question: “Have you ever had a property foreclosed upon or given a deed-in-lieu thereof in the past seven years.” If the bank sees you have had a foreclosure, your loan most likely will be denied. If you lie, you may be subject to investigation by the FBI for mortgage fraud.

Taxation After a Short Sale

A personal residence is exempt from mortgage debt relief until the end of 2012 on a federal level. Some states will still tax you unless you qualify for an exemption. An investor is not exempt from mortgage debt relief, subject to certain conditions.

Taxation After a Foreclosure

Same as with a short sale. Except some lenders immediately send out 1099s, even if the owner is exempt.

Have you had any experience with this or do you know of any discrepancies with the above information?

This post has 6 Comments | Would you like to leave a comment?


  1. Woody:

    Most lenders require 3 years after a short sale to make another purchase. All of the requirements vary by lender but you will probably want to take the first 2 years after your short sale to work on your credit score and save as much as you can for a down payment.

    Lenders will really scrutinize you after a short sale (or foreclosure) so be sure to spend as little as possible now, pay off all credit cards and any other outstanding debt. When you re-apply, they will check not only how much you have in savings but how long its been there. They will look for continued credit improvement.

    Because of your question, I wrote a post today about credit.

    Best to you on your road to recovery and thanks for reading my blog!

  2. Karen,

    For my clarification, borrowing rules for new home purchase following a short sale (ours occurred in May 2010) – are: 1) elegible to borrow for new home purchase in 2 years (I assume with 20% down); 2) elegible for FHA loan in 3 years (5% down?).

    Thanks for your website,

    Woody Sprott

  3. Linda – Did you ask your lender why it showed up on your credit report as a foreclosure? You can also contact the reporting agency and challenge it. If it’s through Equifax, for example, protest it as a mistake (these are entered by humans and there are often mistakes) and they should challenge it for you with the lender. You may find that it’s not too difficult to change.

    What do you mean they “settled” when they 1099’d you? Often they send out 1099’s even if you’re not expected to pay because many people pay when they receive it without a challenge. Did you have to pay it? Did you get the amount reduced?

    Please let me know what happened and thank you so much for sharing your experience here.

  4. We had a short sale. Only 1 30 day late and it shows as a foreclosre so we can’t buy for 3 years. We never had a foreclosure. They 1099d us and settled.

  5. Thanks for your comment!

  6. This is really good information for someone considering a short sale or allowing their mortgage to go to foreclosure.

Leave a Comment