Foreclosure vs. Short Sale
| Issue | Foreclosure | Short Sale |
| Credit Scores | Drops in FICO and other credit scores from 200 to 400 points. | Short sales generally do not affect credit scores, late payments or default in payments can affect credit by 50 to 150 points. |
| Credit Reports | Foreclosure will remain a derogatory mark on credit reports for 7 to 10 years | A short sale is not a derogatory mark on credit report, the credit bureaus mark it as “pay as agreed” or “pay as less than agreed.” |
| Buying again | Most cases must wait at least 7 years before buying again, if the home was a primary residence it may be shortened to 5 years. | If there have been no late payments, some can buy again immediately.
If there have been late payments, two years is required to apply for a Fannie-Mae backed mortgage, or 3 years for an FHA loan. |
| Employment | Many employers are requiring credit checks on all job applications. A foreclosure is one of the most detrimental credit items an application 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 foreclosure (except in those states where there is no deficiency) the bank has the right to pursue a 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 some successful short sales it is possible to convince the lender to give up the right to pursuit a deficiency judgment against the homeowner.
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. |
| Ethics & The Economy: | Foreclosed homes can ruin a neighborhood, causing even further declines in the market values surrounding the home. Some people strip the home of valuables and leave the home abandoned. | Short sales help the economy because the banks have less debt, the homes are kept by individual owners who take care of them, and the bank will pay the realtor’s commission who helped sell the home. |
REO Closing
The Seller In an REO transaction the Seller is an out of state bank. The bank contracts a 3rd party asset management company which represents them in the transaction and approves the final escrow closing. All correspondence is done by email, below are a few items performed by Escrow to help you understand the closing process.
Title Commitment (prelim) There may be unforeseen vesting and/or lien issues on the title report that will require Escrow and/or Bank Seller to correct before closing.
HOA Demands (payoffs) Processing time to obtain HOA/Lien demands is between 5-10 days from the date ordered from the HOA management company. (There may be a possible 5-10 additional processing days to obtain lien demand if lien is not of record.)
Loan Docs Once loan docs are received, Escrow can set an appointment for the buyer the following day.
Home Warranty If Seller is paying for the buyer’s HW, the demand is required before Seller will approve the HUD.
HUD-1 Approval After the buyer signs the loan documents, the REO Seller and their 3rd party Asset Company may require 24 to 72 hours to approve the HUD after ALL demands are received.
FUNDING Escrow will coordinate with buyer’s lender on the Bank’s HUD approval before funding can occur. (Changes to the Seller’s side of the HUD require additional Seller approval.)
* As in any transaction, the more communication you have with your Escrow Team during the REO closing process the better the transaction will be for all parties. If you have any questions, please contact us. We look forward to earning your business.
Transaction Comparison
| RESALE TRANSACTION | REO TRANSACTION | |
| BUYER & SELLER | TRADITIONAL SELLER Usually an individual owner that has employed a professional real estate agent to sell the property. Selling one home and is personally impacted by the state. |
REO SELLER Usually a large corporate lending institution, dealing with a huge volume of properties. Typically employ a large staff and an Asset Management Company |
| CONTRACT | TRADITIONAL CONTRACT DELIVERY Buyer and seller directly responsible for negotiating, executing and signing. Changes and addendums made directly. |
REO CONTRACT DELIVERY Negotiating done by one department, then file is moved to another department to close. Changes difficult and time consuming. |
| COMMITMENT FOR TITLE INSURANCE | The turn time for a resale transaction is 1-2 days. The stated turn time for REO orders is 3 days. | |
| HOA | HOA TYPICALLY CLEAR HOA information is normally known within 24 hours of opening. HOA payments are usually up to date and the demand is received faster. |
HOA OFTEN IN COLLECTION HOA information is not normally known and must be researched. HOA has often gone to collection attorney. HOA demand document can take 10 days. |
| DEEDS | LOCALLY PROCESSED Deed is executed by seller, without delay. |
PROCESSED OUT OF STATE Asset manager often must obtain deed from financial institution. If title is clear, deed can be returned within 72 hours, however delays often occur. |
| HUD APPROVAL | HUD APPROVAL QUICK & EASY HUD statement is prepared and submitted to agents for final approval well before closing. Changes to contract and commissions are quickly approved by agents and principals on a local level. |
HUD APPROVAL COMPLEX AND SLOW HUD statement must be approved by asset management company and submitted to bank for approval. Any changes in terms can cause delays, up to 10 days. |
| CLOSING | TRADITIONAL SIGNING Escrow officer signs parties, funding occurs, and sale is recorded. |
COMPLICATED BY APPROVAL PROCESS Changes require approvals of multiple entities, causing closing delays. Consider possibility of closing delay, especially if buyer is moving. |
