You must be able to prove financial hardship in order to qualify for a short sale. Acceptable forms of hardship include: Loss of Job, Business Failure, Damage to Property, Death of a Spouse or family members, Severe Illness, Divorce. Mandatory Job Relocation, Medical Bills, Military Service, Payment increase or Mortgage Adjustment, Reduced Income, Separation, Too much Debt and Incarceration.
If you can establish that one of these is a reason that you can no longer afford to pay your mortgage, you may qualify for a short sale. Another factor in qualifying is that you may not be able to pay down the mortgage, so you cannot have enough liquid assets to do so.
A Homeowner who loses their home to Foreclosure:
- May not be able to get another Fannie Mae backed mortgage for 5 years (for investors, this is 7 years)
- Will have to answer YES to the question "Have you had a property foreclosed upon or given title or deed in lieu thereof in the last 7 years?" when applying for future loans, this will affect future rates
- Credit score may be lowered anywhere from 250 to over 300 points for over 3 years
- Will be on public record permanently as having been foreclosed upon, and their credit history will show the foreclosure for 10 years or more
- For those that have security clearance, it will most likely be revoked and their position terminated
- Could lose their job or be reassigned, as many employers are actively checking the credit of all employees who are in sensitive positions
- May be challenged when seeking future employment, due to their credit rating
- In 100% of foreclosures (except in certain states), the bank has the right to pursue a deficiency judgement and the amount of deficiency would most likely be larger than if it were a short sale because the property could be sold at a lower price through auction or just because of the time the property spent on the market.
A Homeowner that successfully negotiates a Short Sale:
- Will be elible for a Fannie Mae backed mortgage after only 2 years (For investors as well)
- There is no declaration on future loan applications that ask whether you have previously negotiated a short sale
- Your credit score would only show late mortgage payments and then that the mortgage was "settled", "paid as negotiated", or "paid as agreed". This can lower the score by as little as 50 points for as brief as 12 to 18 months
- A short sale is currently not reported on credit history
- A short sale does not currently challenge most security clearances
- A short sale does not challenge current or future employment
- In some successful short sales, it is possible to convince the lender to give up the right to pursue a deficiency judgement against the homeowner
- In a properly managed short sale, the home should be sold close to market value and will most likely be higher than an REO sale which results in a lower deficiency