Freddie Mac counts foreclosures as a major credit black mark for seven years and is now aggressively pursuing walk-away borrowers, where permitted by law. Sending the keys back to the lender comes with rigid consequences which should be fully understand before a foreclosure.

The borrower will be unable to get another mortgage through Fannie Mae for five years, unless there are “documented extenuating circumstances.” In that case, the prohibition is three years. Even after the prescribed time has elapsed, a borrower with a foreclosure in his/her file will have to make at least a 10% down payment and have a FICO credit score of at least 680 to qualify for a Fannie Mae loan.

The short sale is by far the better option to a foreclosure, provided there is evidence of hardship. A short sale occurs when home owners negotiate loan modifications with lenders and have portions of their principal debt forgiven. A Federal legislation was enacted last year to eliminate tax liability for the amount forgiven in a short sale. 

By contrast, the debt from a foreclosure is not forgiven, and according to the Internal Revenue Service, the borrower may have to pay taxes on the unpaid balance.

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