The Siberian Dilemma: Foreclosure or Short Sale?


by Roberta Murphy

The grey-haired man

Carlsbad, CA–When considering the hard choices faced by distressed San Diego real estate owners, it’s not too difficult to recall what is called the Siberian Dilemma:

If you are stranded on a frozen lake in Siberia and fall through the ice, you have four minutes to live. If you crawl out of the hole into the frozen air, you have two minutes to live. Neither are good choices.

The frozen dilemma may seem out of place in sunny San Diego, but some make the mistake of assuming that the long term consequences of short sales and foreclosures are essentially the same. That assumption could be disastrous.

If you are faced with the dilemma of pursuing a short sale or allowing  your distressed property to go to foreclosure, there are some important factors to consider:

Credit Issues

If you lose your San Diego home to foreclosure, your credit or FICO score may be dinged 250 to over 300 points and will typically harm your score for at least 3 years. A short sale, on the other hand, may only reflect late payments–and after sale, the mortgage will be reported as paid or negotiated. If all other credit payments are being made on time, the credit score hit could be as little as 50 points.

It’s also important to note that a foreclosure will remain as a public record reflecting one’s credit history for 10 years or more, while short sales are currently NOT reported as such on credit histories.

Future Mortgages

A foreclosure may wreak havoc with your attempt to obtain a mortgage in the next 5 to 7 years. The standard 1003 mortgage application currently asks, “Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?”  One whose primary home has gone to foreclosure is not eligible to receive a Fannie Mae-backed mortgage for 5 years. And it’s even worse for the investor, who cannot receive a Fannie-backed investment mortgage for 7 years.

Short sales are treated quite differently. A homeowner or investor who has sold via short sale will be unable to obtain a Fannie-Mae back home or investment mortgage for just 2 years.  Quite a difference!


This will hopefully change in the future, but currently a foreclosure  in one’s background can create real challenges with federal, state and local security clearances. This could be a real problem for both prospective and active military, police, FBI and other positions requiring security clearance.  Additionally, many employers require credit checks for all job applicants as well as periodic checks on employees in sensitive positions. A foreclosure could result in loss of employment—or none altogether.

Meanwhile, a short sale is currently NOT reported on credit reports and therefore presents NO challenge to current or future employment.

San Diego County homeowners who are under huge distress with escalated mortgages, homes that are worth less than what was originally paid, and/or loss of income may feel that all is lost–including their homes and future possibilities.

Dismiss those defeating thoughts.

After much research and personal experience, we have determined that a leap out of freezing water (pre-foreclosure) might offer hope of salvation if immediate action (short sale) is taken to settle old mortgages so that distressed homeowners can eventually reclaim their lives.

We are now aggressively seeking San Diego area home sellers who wish to avoid foreclosure. On a selfish level, we believe that a successful short sale might result in a lifelong client.

On a realistic level, we know that each home saved from foreclosure saves not only a future homeowner, but potentially our entire economy.